![]() If you’re borrowing money from someone else, like if you decide to take a car loan, lower interest rates are generally better. ![]() Are you borrowing or lending? If you’re lending your money to someone else, like when you deposit money into a bank account, higher interest rates are generally better.Now that you understand what interest is and why it exists, you’re probably wondering, “What’s a good interest rate?” The short answer is, it depends on a few things: It’s much less confusing to quote the price as a consistent interest rate rather than quoting different peso-amounts for each borrower. ![]() ![]() Most lenders will quote their price as an interest rate rather than a peso-amount because everyone borrows different amounts of money. For example, if you are paying P10,000 in exchange for borrowing P100,000, then your interest rate is 10% or P10,000 divided by P100,000. You also have to pay “rent” in the form of interest for being allowed to borrow the money at all.Īn interest rate is basically the “rental fee” described as a percentage of the loan amount. Just like renting a house or an apartment, you get to use the money immediately but you have to give it back at some point in the future. Interest is like a rental fee that a borrower pays to get money right away. Having money now is more valuable than having the same amount of money in the future, and that is why lenders can charge interest when giving out loans. If you could only get P100,000 a year from today, then you would just have P100,000 without any other potential earnings. This is because of the potential earnings you can get from money that’s available today, which you can’t get if the money will only be available in the future.įor example, if you had P100,000 today, you could invest it into your business and turn it into P200,000 after a year. Time Value of Money is the idea that a set amount of money -let’s say P100,000-is worth more today than it will be worth in the future. Understanding this should make it easier to understand how interest exists in the first place. ![]() Before we start talking about interest rates, let’s talk about the Time Value of Money. ![]()
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