The History Of Interest Rates …

Interest! Interest is money that is paid to a lender over and above the borrowed amount. Interest is also money that is paid to savers on savings accounts, certificates of deposits, money market accounts, etc. Interest rates vary greatly from institution to institution and over time ? sometimes even very short periods of time. The basic idea is that lenders and savers want to collect as much interest as possible, while borrowers want to pay as little interest as possible.

You've probably heard the terms used to describe interest unless you've been living under a rock; simple interest, compound interest, prime rate, subprime rate ? the list goes on.

The idea of interest has a long and colorful history. In the Middle Ages, charging interest was considered a sin. The reasoning was that time belonged to God, and charging interest was in effect trading what belonged to God. The Catholic Church also had an opinion about charging interest. According to St. Thomas Aquinas, charging interest was wrong because it amounted to "double charging." That idea was never enforced by the church, though.

During the Renaissance, it was determined that "The person who received a loan benefited and one could consider interest as a premium paid for the risk taken by the loaning party." That is the theory that prevails today.

Interest rates vary for many reasons. The economy is one reason, with various aspects of the economy having different degrees of influence. Basically, all interest is tied in one way or another to the "prime rate."

The prime rate is the lowest rate of interest charged by banks when they lend to their most credit-worthy and largest corporate customers. The prime rate is a sort of "point of reference" by which other interest rates are measured.

Each bank sets its own prime rate. The Federal Reserve targets a specific rate and most banks go with that target rate, but they don't have to.

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