What are the disadvantages and advantages of interest rates?

Answer 1

Interest rates are generally applied to cover the collateral risk of defaulting loans. A borrower is compensating the lender for the length of time that money is held - money that the lender could have invested elsewhere.An analogy is that I borrow you a pen. Then when I ask you to return it, I request that you give back 10 additional pens in compensation because I could have used that pen to write a novel.

AdvantagesThe main advantages of interest rates are the profits to the lender from loaning money. This encourages the flow of credit.

During periods of high inflation, interest rates are applied to curb the price of goods and services.

Another advantage is the return rewarded to those who invest money into savings. As savings are relatively risk free in comparison to other investments, during periods of high interest rates the level of yield can be favourable only if the savings are of a large amount.

DisadvantagesUltimately interest rates are favoured significantly unfairly towards the profit of banks and lenders and grossly disadvantage the borrower.

Interest rates contributed to the current recession due to banks irresponsibly distributing high-risk loans on

under the premise of returns from interest.On a wider scale, it could be suggested that it is the general society - the smaller/medium sized businesses, the lower/middle income earners and the ordinary folk who are most greatly disadvantaged as they are repaying an ever an increasing amount of debt.