But they only do so under certain conditions. Before putting their money on a bank account or, in other words, lending their money to a bank (which in turn will then lend money to the company that needs it)
- they will demand compensation to offset the effect of rising prices (inflation) from the moment in time they deposit their money in the bank and the day they want to withdraw it and spend it. They want to make sure that with their money saved, they will be able to buy the same amount of goods and services in the future as they can today.
- then, they will require a certain premium for assuming the risk that those to whom they entrust their money do not repay them later, and finally
- they may feel that they deserve compensation for agreeing to refrain from spending their money right away and to put it at the disposal of the bank which in turn will “work” with this money by awarding loans for example.
The bank is the intermediary between the various parties – those who want to borrow and those who can provide money.
The Bank defines the level of credit interest it pays to the savers as well as the level of debit interest to be paid by borrowers.
Interest is expressed as a percentage (%) – this is called the interest rate. It specifies what savers receive on their savings / what borrowers have to pay for a loan for a given period (usually one year).
The interest rate may be either a fixed rate, which does not change during the entire term of the investment or loan, or a variable rate. In this case, it is adjusted periodically.
In simple terms, one can say that the credit interest is the price that savers demand to “offer” their money, and that debit interest is the price that borrowers pay to borrow money.
As we have seen above, money is a commodity like any other. Its price – the interest rate – thus fluctuates according to supply and demand of money. A high supply and a low demand for money depress its price; a low supply and a high demand pushes the price up.
