Loan interest is payment for the fact that the owner of capital refuses to use it independently and provides other people with the opportunity for its current, current use. In fact, the size of the loan interest can be called a kind of equilibrium point between the supply of available funds and the demand for these funds.
Speaking more in simple language, loan interest can be called the price that must be paid to the owner of capital for its use. The period of time during which the borrower can use the loan is determined in advance.
Its value can be expressed using the interest rate (loan interest rate) for the year.
In its turn, interest rate is a certain amount of financial resources that must be paid for the use of one borrowed monetary unit during the year. A special formula is used to calculate the rate.
There are two separate types of interest rates: nominal and real.
- By the nominal lending rate, it should be understood that the rate is expressed in monetary units at the current exchange rate without taking into account the rate of inflation. This is a certain amount of financial resources that are paid per unit of borrowed currency for a previously agreed period of time. The nominal rate shows the relationship between the amount that the borrower must return to the lender and the amount that was previously received in the form.
In this case, the calculation is made using the following formula:
S = P (1+ ni), where
S - the amount of loan payments taking into account the initial debt (increased amount of debt);
P—original debt;
n is the duration of the loan in years or the ratio of the period of use of the loan in days to the applicable calculation base (360 or 365 days);
i is the interest rate.
- The real interest rate implies a rate that is expressed in certain monetary units, taking into account the pace of development. The real rate is one of the main factors in the decision-making process in the investment segment.
The interest rate level that takes into account inflation can be calculated in 2 ways:
Those close to you:
i f = i + f ,
where f is in percentage.
- precise:
i f = i + f + i * f / 100
The size of the loan interest depends on many factors - risk, the period for which the loan is provided and its security, the size of the loan provided and income, as well as current competitive conditions.
Loan interest represents a reward for the use of borrowed monetary resources (otherwise called loan capital or credit) for a limited amount of time. In other words, it is the interest rate that reflects the cost of borrowed money and actually shows the price of the loan. Loan interest is calculated using the formula indicated in the figure on the right.
The economic category under consideration occurs in the case when some owner of free financial resources transfers them to another person for some time for the purpose of useful consumption. That is, the borrower, as it were, buys the utility of the provided capital, which is expressed in the possibility of generating profit from this money, while the loan interest is the price of these resources paid by the borrower to the owner of the loan capital.
The source of payment of loan interest is the added value that arises at the time of effective use of the loan provided. The loan is exploited as capital, which is invested in production, so the level of payment for the loan cannot be higher than the rate of profit generated as a result of using the loan (otherwise the loan is not used rationally).
What determines the interest rate?
Like the cost of any product, the price of a loan tends to change its value, so the loan interest may vary over different periods depending on the supply and demand for credit resources. The relationship between supply and demand is determined by the following factors:
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The amount of cash accumulations and savings that are sources of credit opportunities - the larger this indicator, the lower the loan interest (since the supply is large).
Cyclical production. At some times the demand for investment increases (for example, during economic expansion), and at other times it decreases. Thus, the higher the investment demand, the higher the interest rate.
State regulation of the money supply in circulation - the more money in circulation in the system, the higher interest rates.
Inflation rates.
As inflation processes intensify, interest rates increase, and a distinction is made between nominal and real rates. Real % is calculated as nominal % minus the average annual depreciation of money. In the case when the inflation rate exceeds the rate increase, the loan interest becomes negative, i.e. is actually charged to the lender rather than the borrower.
Exchange rate fluctuations - the higher the foreign currency exchange rate, the lower the interest rate, and vice versa.
International capital flows, etc.
, Thus, the dynamics of the interest rate is mainly determined by the market mechanism, but largely depends on government regulation. refinancing rate
) - a monetary payment required by central and commercial banks of most European, African and American countries for the use of borrowed funds (loans). The presence of loan interest implies the return of borrowed funds in an amount significantly exceeding the amount originally issued to the borrower in the form of a loan. Thus, the dynamics of the interest rate is mainly determined by the market mechanism, but largely depends on government regulation. Also often the loan interest is called the discount rate. The discount rate is the percentage fee that the central bank sets on loans provided to commercial banks. In Russian practice the term is used
. The higher the central bank discount rate, the higher the interest rate commercial banks then charge for the credit they provide to customers and vice versa.
Consequences
Ratio of GDP growth and total debt in the United States for the period from 1973 to 2008. The consequences of the presence of interest on loans in the financial system is an exponential increase in the total debt bank loans . As a consequence, to repay this debt, central banks are required to regularly make additional money issue
, which leads to a disproportionate growth of the money supply relative to the gross domestic product. In practice, the total debt of private businesses and individual citizens can never be repaid since this debt in the form of loan interest is included in every currency unit issued into the economy. Paradoxically, the more money is issued into the economy, the larger the total debt becomes, which ultimately leads to economic stagnation and default of the national economy.
Story
Even in the Old Testament (Deuteronomy), it was noted that people knew about the impact of the interest system on the social mechanism. Therefore, once every seven years the “Holy Year” was recognized - the year of debt forgiveness, under the control of the community elders.
Loan interest (interest income)- This is the monetary reward that lenders receive by providing a loan. Loan interest is the price of the loan, or the payment that the borrower of money owes to the lender for using the loan.
IN economic theory There is a tradition to use the term “loan interest” instead of the term “interest income”. At the same time, the concept of loan interest has a certain meaning from the point of view of its origin. Loan interest represents income on loan capital, thereby emphasizing the monetary nature of interest.
Loan interest expresses the relationship between lenders and borrowers. Essentially, it characterizes: 1) income distribution; 2) risks that lenders and borrowers bear in the lending process.
When distributing income received from invested funds, the borrower's share is business income, and the lender's share is loan interest.
Lenders are rewarded for the risk of default, while borrowers risk not earning enough income to meet their loan obligations. Therefore, determining the interest rate is one of the most difficult tasks in lending to borrowers: lenders strive to set the rate high enough to make a profit and offset their risks, but the rate must be low enough so that the borrower can repay the loan without turning to another lender or another segment of the financial market. There are also objective economic factors that determine the variety, structure and level of interest rates. Knowledge and understanding of these factors is necessary when studying the credit and financial sphere, in order to make practical financial decisions.
Interest rate(interest rate) – the rate of return to the loan amount.
The source of interest is the income received from the use of the loan.
The movement of the loaned value is as follows:
D - D, i.e. D - D = ΔD
Where D– loanable value;
D– increased amount of debt;
ΔD – increment to the loan, acting as a payment for the loan.
For the lender, the purpose of the transaction is to obtain a certain income on the loaned value; the entrepreneur also raises funds in order to increase profits. Its size depends on the price of the product and the cost of its production, i.e. from the cost of production, representing the costs of living and materialized labor. When an entrepreneur borrows money, he must pay interest from the profits. If we proceed from the principle of equal return on invested funds, then for one ruble of borrowed funds there is a profit amount corresponding to the return on one’s own investments. The clash of interests of the owner of the funds and the entrepreneur who puts them into circulation leads to the division of profits on the invested funds between the borrower and the lender. The latter's share appears in the form of loan interest.
Existing theories of loan interest are based on the existence of an inextricable relationship between the demand and supply of funds, the volume of savings and investments, interest and income as elements of a single system. Moreover, its macroeconomic analysis is possible only taking into account the simultaneous consideration of all the identified components.
This approach can be expressed through a system of functions:
Where M- offer, Money;
L– money demand function;
S– savings function;
I– function of investment volume;
i– interest rate;
y- income level.
The first equation determines the relationship between the demand and supply of funds, and the second - between the volume of savings and investments. Taking into account a given amount of money, a one-time solution of the system of these equations allows, in the author’s opinion, to determine the rate of loan interest and the level of income on investment.
In other words, at the current level of income on investments, the interest rate in the money market is formed by the relationship between the supply and demand of funds. At the same time, with a constant interest rate, the level of income in the “real” sector is determined by the volume of savings and investments. The monetary sphere and the real (production) sector are closely interconnected. Changes in the relationship between demand and supply of funds lead to fluctuations in interest rates, which in turn affects the formation of demand for investments and, ultimately, the level of income. An increase or decrease in the profitability of investments, on the contrary, determines the size of money demand and, consequently, the level of loan interest.
The considered mechanism for forming the level of loan interest is based on the developments of a number of areas that have made a significant contribution to the development of the theory of this problem. The main ones are the real, or classical, theory of interest, the theory of loanable funds and the Keynesian theory of liquidity preference.
Classical theory of interest assumes that the only variables that affect the rate of interest, even in the short term, are investments and savings.
A simple real-world model of the bond market includes a bond supply and demand function and the equilibrium interest rate, which is established at the point of their equality ( Bd – B s, I m– equilibrium rate of interest).
B s– function of bond offers; Bd– bond demand function; S(i)– savings function; I(i)– investment function
The demand and supply of bonds are assumed to be equal to savings and investment, and hence the equilibrium condition can also be represented as S(i)= I(i) , i.e. the interest rate is determined by the balance of planned savings and investments.
The classical theory of interest abstracts from the influence of a number of factors. However, this theory does not take into account the impact of other markets on the supply and demand for bonds; it is assumed that bonds are the only type of asset that the consumer has; a number of other assumptions are made.
Neoclassical loan fund theory, developed by economists of the Stockholm and Cambridge schools, expands the concept of demand and supply of capital, complementing it with the demand for cash and the growth of the money supply. In this case, the flow of demand for bonds is equated to the amount of planned savings and some increase in the money supply over any period:
B d = S(i) + M s
Where Ms– growth of the money supply over a certain period of time.
It is recognized that the demand for loanable funds (or the flow of supply of bonds) is caused by the need to finance productive investment, as well as the demand for credit on the part of those seeking to increase their cash holdings, which can be expressed by the following function:
B s = I(i) + M d (i)
Where Md(i) – money demand in order to increase cash flow.
The market equilibrium condition will then receive the following expression:
S(i) + M d (i) = I(i) + M s (i)
According to the theory of loan funds, the rate of interest is largely a monetary phenomenon. It is determined both by real factors (savings and investments) and monetary ones (demand for money and their supply), and the level of interest can be changed directly due to the influence of the latter.
In Keynesian liquidity preference theories the interest rate is determined as a reward for parting with liquidity. Keynes noted that interest is the price that balances the desire to hold wealth in the form of cash with the amount of cash available, i.e. The quantity of money in circulation is another factor which, together with the preference for liquidity under given circumstances, determines the actual rate of interest.
Thus, the level of interest, taking into account a given income, changes in direct relation to the degree of preference for liquidity and in reverse – to the amount of money in circulation:
Where M ’ - amount of money;
L ’ – function of liquidity preferences.
It should be noted that the liquidity preference of J.M. Keynes depends on treatment, precaution and speculative considerations.
Keynes determined that the liquidity preference schedule L= L(y 0 , i) , reflecting the relationship between the quantity of money and the interest rate, represents a smooth curve that falls as the volume of the money supply grows. At the point of intersection of the function with a given supply of funds ( M) the equilibrium interest rate for the present moment will be obtained ( i 0 ).
Thus, a feature of Keynesian theory is the assumption that the interest rate is formed as a result of the interaction of demand and supply of funds. In this case, interest is considered as a psychological phenomenon.
A financial economic value that characterizes a certain price for the opportunity to use bank funds and is determined for a specified time period is loan interest.
This definition arose due to the presence of market relations in which the commodity is the lender’s capital transferred on loan.
What is loan interest?
Loan interest is a certain rate for a loan, otherwise it is a debt that must be repaid by the borrower of funds provided by the lender (surcharge). The moment until which the recipient of the loan has the full right to use the borrowed capital is negotiated in advance.
The amount of funds making up the loan is expressed by the annual interest rate.
The interest rate is a certain cost of money that the borrower is obliged to pay to the lender for the use of his loan funds. To establish the percentage value, as a rule, use the formula presented below:
r = (R / K) x 100%, with:
- r is the value of the loan premium;
- R is the lender's income for the year;
- K is the size of the loan issued at interest.
There are two types of lending premium rates:
- Nominal.
- Real.
Each of these types represents a certain value of the interest rate, and therefore the income of the lender.
However, they may differ significantly from each other at a certain point in time.
Let's look at each of these types in more detail:
- The nominal type is the lending premium rate expressed in financial terms at the current exchange rate. Moreover, progressive inflation is not considered. The size of this type of rate is the ratio between the funds representing the loan recipient's debt to the lender (the full amount of the debt) and the funds originally received as debt.
- The real type is a value expressed in a certain value equivalent, taking into account the progress of inflation. The actual type of interest rate is one of the main factors when making investment decisions.
Functions of loan interest
Loan interest is of significant importance in the economy of any state.
This is confirmed by his goals:
- Balancing the matching of supply and demand for loans thanks to the interest rate. In other words, due to this value, the lender benefits by providing the borrower with personal funds.
- Thanks to surcharges, the scale of attracted deposits is regulated. The increase in people's need to purchase a loan must be covered by increasing bank deposits, which act as a source of lending. The nominal deposit interest rate is increased to an amount that regulates the demand for deposits and their supply. If people's need to purchase loans decreases, the lender's profit from the loans provided decreases.
- Commercial banks use interest rates to effectively manage the liquidity of their balance sheet.
The Central Bank determines what the rate for the use of its assets will be, which is gradually turning into a significant lever for managing commercial banks. And, despite the fact that the Central Bank does not directly balance the interest rate policy of commercial banks, it determines its monolithic nature within the state, thus stimulating a decrease or increase in loan rates.
Usage and mechanism of application
Nowadays, a certain scope of application of loan interest has developed in the economy:
- firstly, he fundamentally justifies his term - interest - as a component of the commodity relationship;
- secondly, it is dependent on the objectives and settings of a certain interest rate policy.
Each specific debt relationship must be concluded by drawing up an appropriate document, which specifies the degree of loan interest, its calculation and collection. The document is concluded between the lender and the recipient of funds, considering the existing supply and demand for loan capital.
The administrative manager of the loan interest rate has always been the Central Bank. However, in Lately, this value is increasingly managed by regulating its level with bank levers.
What does the interest rate depend on?
The amount of loan interest depends on a large number of conditions.
Its cost is often determined by the following main factors:
The amount of loan interest also depends on the number of competing banks in the market. The high value of the bank will indicate its increased loan interest rate.
Forms of loan interest
Despite the established and regulated interest characteristics, loan interest cannot be uniform. This value can be characterized by several criteria; in addition, it has different kinds and shapes.
So, based on the nature of credit investment, the loan premium may have the name:
- commercial;
- banking;
- consumer;
- and government lending.
There are various classifications of interest that have fundamental differences:
- accounting- if charged by the Central Bank for the transfer of funds to certain commercial banks by purchase method valuable papers or their re-discounting;
- deposit- if it is paid by banking institutions to persons who previously placed deposits with them;
- on loans- dividend for the use of borrowed funds.
In addition, the percentage may differ according to the managers who set the rate, the size, procedure and form of collecting capital and income, as well as the source of payment: profit, cost or other existing income.
Based on the type of institution, the loan interest can be:
- accounting of the Central Bank;
- ordinary banking;
- pawn shop
Depending on the type of investment, this value can be characterized as an investment value:
- in working capital;
- to fixed assets;
- in securities.
Among other things, loan interest can be divided into several classifiers based on the type of operations performed: deposit, loan or credit (interbank).
Loan price - factors that determine it
There are various factors that determine the cost of a loan.
The basic ones are the following:
At the same time, the final rate of loan interest received from the recipient of investment funds for the opportunity to use loan capital covered the lender’s expenses for raising funds, which were directed:
- to provide requested loans;
- to conduct banking business;
- to generate profit and income.
There are two types of interest rates:
- Fixed - will remain unchanged throughout the entire period of use of the loan.
- Floating - can be changed by the lender throughout the entire term of using the loan or deposit agreement.
The terms of the change and the type of interest rate must be taken into account when filling out the agreement.
Methods for calculating loan interest
The banking practice of each state has its own characteristics of calculating and calculating loan markups.
These calculation methods differ in the nature of measuring the period of use of the loan and the number of days per year:
- The English method consists in accurately determining interest based on the actual number of days of the loan. This method allows you to get the most accurate result. This is the method used in our country.
- The French method is to accurately determine the days of the loan at normal interest rates. This method allows you to get the largest amount of loan interest compared to others.
- The German method is based on the approximate number of days of borrowing at normal interest rates.
When calculating the premium for the use of borrowed funds, use the simple or compound interest method:
- A simple surcharge. A method in which the overpayment is calculated by a base constant amount (preliminary loan amount). This method is used in case of short-term loans.
- Complex allowance. This method is used in the case of a long-term loan. In this case, when the accrual period expires, re-accrual is made for the increased cost.
To calculate both the first and second methods, special formulas are used that take into account the preliminary cost of the loan, the period of use of the loan, interest rates, and inflationary progress.
Loan capital market
Loan capital is funds provided by a lender as a loan to an entrepreneur, who must subsequently invest these funds in his own project that will generate income.
In turn, the loan investment market is a system of financial markets, which are distinguished by the redistribution of funds from lenders to borrowers with the help of additional persons called intermediaries.
Thus, the participants in the loan capital market are:
- lenders;
- credit borrowers;
- intermediaries.
The regulation of funds in such a market takes place by considering the existing supply and demand for loan investment. The overriding mission of the loan investment market is to transform idle financial assets into investment.
In general terms, the increasing role of loan interest and the personification of the value as an effective component of economic regulation are associated with the course of the current economic policy, the situation in the state and the nature of the reforms. In modern economic market relations, the importance of the loan dividend increases due to its regulatory function.