what are interest rates? and what are they used for?

Answer 1

Interest rates are fees paid to a lender of cash. for example: You borrow $1,000 from a bank at 10% interest. Your actually going to pay back a total of $1100. the extra $100 is your interest on the loan and is bacilly money in the lenders pocket.

Your Credit Score plays a big factor in your interest rate on certain loans. If you have a poor credit rating, your going to pay more interest because you considered a higher risk when it comes to paying back money. If you have a great credit score, you pay less interest, because your considered a good risk and the lender is sure that he will get his money back.

Answer 2

Interest is the "rent" paid to borrow money.The original amount lent is called the "principal," and the percentage of the principal which is paid/payable over a period of time is the "interest rate."
There are different forms of interest which explain some of the 'reasons' behind interest.
Opportunity cost: This encompasses any other use to which the money could be put, including lending to others, investing elsewhere, holding cash (for safety, for example), and simply spending the funds.
Inflation: Since the lender is deferring his use of the money, he will at a bare minimum, want to recover enough to pay the increased cost of goods due to inflation. Because future inflation is unknown, there are three tactics.

Charge X% interest 'plus inflation'. Many governments issue 'real-return' or 'inflation indexed' bonds. The principal amount and the interest payments are continually increased by the rate of inflations.
Decide on the 'expected' inflation rate. This still leaves both parties exposed to the risk of 'unexpected' inflation.

Allow the interest rate to be periodically changed. While a 'fixed interest rate' remains the same throughout the life of the debt, 'variable' or 'floating' rates can be reset. There are derivative products that allow for hedging and swaps between the two.

Default: There is always the risk the borrower will become bankrupt, abscond or otherwise default on the loan. The risk premium attempts to measure the integrity of the borrower, the risk of his enterprise succeeding and the security of any collateral pledged. Loans to developing countries have higher risk premiums than those to the US government. An operating line of credit to a business will have a higher rate than a mortgage.

worthiness of businesses is measured by bond rating services and individual's credit scores by credit bureaus. The risks of an individual debt may have a large standard deviation of possibilities. The lender may want to cover his maximum risk. But lenders with portfolios of debt can lower the risk premium to cover just the most probable outcome.

Deferred consumption: Charging interest equal only to inflation will leave the lender with the same purchasing power, but he would prefer his own consumption NOW rather than later. There will be an interest premium of the delay. See the discussion at time value of money. He may not want to consume, but instead would invest in another product. The possible return he could realize in competing investments will determine what interest he charges.

Length of time: Time has two effects.

Shorter terms have less risk of default and inflation because the near future is easier to predict than events 20 year off.
Longer terms allow for investments in larger projects with higher eventual returns. Contrast this to the lender's preference for readily available cash for contingencies. This is why banks pay higher interest on non-redeemable GICs than on chequing account balances.
Long-term interest rates fell in much of the developed world in the second half of 2006.
Other: Borrowers and lenders may face individual tax rates, transaction costs and foreign exchange rate risks. In a liquid market they cannot exert their personal preferences. It is the sum total of the participants who determine rates. The market for financial instruments has moved from the local, to the national, and is now international.

The above provides a brief if not comprehensive answer to your question. The thing is it can get quite complex so the more specfic you are in what you need to know about interest in reference to then the better the answer!

Answer 3

Interest rates tell consumers and business the price to borrow money. It pays the lender a fee to give up use of their money for a period of time.

Answer 4

The price of money. Ration money.