The possibility of using money for a time is a good (more correctly, a service) in itself, from which utility can be derived, such as being able to face payments for which we do not have resources at present, to make the purchase of high value goods, etc. Like all goods or services that are scarce, the use of money is subject to a price, which is the interest rate.
The interest rate is used to calculate the cost of a loan for its borrower (that is, how much the borrower is going to pay to have the money they receive from an institution) or the return a saver gets by investing their money.
It is expressed as a percentage of the capital loaned by the institution or deposited by the client, and normally refers to a period of one year.
We have to differentiate between two classes:
- Nominal interest rate: The percentage expresses the total cost of money in a loan transaction or the total return in a savings or investment transaction. It reflects the rate at which the transactions are taken out. The nominal interest rate consists of two components: The real component and the inflation component.
- Real interest rate: It is the difference between the nominal interest rate and the inflation rate. It allows calculating the real cost of a loan or the real return of a deposit or a investment, since the effect of inflation must be discounted from the gain / interest payment. The real interest rate is calculated by subtracting the inflation rate from the nominal interest rate. In other words, a part of the interest paid on a loan or received on a deposit or a investment is intended to compensate for the loss of purchasing power of the capital and, therefore, does not really constitute a cost or a return.
