What is a Bank Rate?

Bank Rates

Simply put, a bank rate is the amount of money a person will pay to use money they borrow from a bank in the form of a loan; the money paid to use someone else’s funds is called interests. In those terms, bank rates apply to national banks, which provide loans to either private persons or companies needing start up capital.

The term bank rate also applies to central banks, but in a different way. When used in talking about central banks, the term bank rate refers to monies that are lent out to national banks. The primary purpose of a central bank is to control the supply of currency available to national banks.

Terms associated with Bank Rates

When considering bank rates, there are some helpful terms to remember:

1. APR: Also known as annul percentage rate. If the APR is being applied to a mortgage then points are generally also charged, which means that the borrower is charged a fee, usually equal to one percent of the loan. This along with the APR will eventually have to be paid back.

2. APY: Also known as annul percentage yield. This term applies to the lenders and refers to the amount of money they make charging interest on loans they have given out. The rate at which interest is charged will determine what the APY is. If interest is charged every month on a loan then it is likely to have a higher APY, but loans that only charge yearly interest will have a lower APY.

Why we must pay interest?

In an ideal world we’d be able to borrow money and pay it back without any interest. But that is not the case and few people are able to borrow money (not from a profession lender) based only on their good word that they will pay the lender back. When getting a loan a bank or private lender will want interest paid because they are taking a risk when lending money, they need money to cover the costs of staying in business, and just like all companies, they too are out to make a profit beyond covering their losses. Mostly, interest is what all of us are willing to pay (as long as they are not too high) to have the ability to purchase items that we simply don’t have enough money to buy on our own, thing like homes, cars and property.