I have read more than a few posts about interest and what interest truly is...

[WCGreen]

Here is a simple way of looking at how an interest rate for borrowing is determined.

First, the interest rate is based on the time valuation of the money borrowed. If the rate of inflation is say 2%, that means the real value of the money you pay back is going to be devalued by the inflation rate. That is the first component.

Second is the value of your credit history. This is simply the risk factor or chance that you will default.

And third, the last component is the money that the lender feels entitled to by tying up their money by lending it to you. This is called the missed opportunity for the lender.

This is also the way Finance people use to value the premium wanted from a stock investment.


Below is a more technical version, but this is what they taught us in Finance Class. At one time I wanted to work in the financial sector. I ended up getting involved with politics and doing tax returns.

http://www.finpipe.com/intcomp.htm

I really think this should be taught in regular math class in high school. People need to be prepared to deal with a basic understanding of how financial equations are used in life.

[bbinacan]

1. I agree, it should be in math class. n/t

[CaliforniaPeggy]

2. People DO need to be prepared, and so many aren't.

Your idea is very meritorious.

[csziggy]

3. How does this explain why people with excellent credit histories are paying

What used to be usurious interest rates? I can remember when 18% was the top legal interest rate on credit accounts. Now, 18% is considered by many to be a good rate since many credit card companies routinely charge 30%.

At the same time, banks basically pay nothing on savings accounts. If money is so dear they must charge exorbitant rates for credit, shouldn't they be paying more for the use of their customers' money?

[WCGreen]

4. That is what they determine as their risk factor....

It's also what they can get away with.

I am not condoning anything any lender does I am merely pointing what goes into determining interest rates...

[sam11111]

5. "how much can we pricegouge this dumblooking guy?"...this sets interest levels.

the "factors" in OP are propoganda to get the Public to accept whatever gouge level they dictate.

Much as other phony excuses are trotted out for other RW actions.....

"Taxcuts for the rich so more prosperity above...will trickledown"

[WCGreen]

6. most of those 30% interest rates are because they are loaning

money that is no secured.

That is why the same person can get a 5% mortgage and pay 20% on a credit card...

[csziggy]

10. Twenty five years ago I could get an unsecured loan at 7% interest

Which I used to pay off credit cards charging 10% interest. I am a much more reliable person now than I was then, but unsecured loans other than credit cards are pretty much a thing of the past for average people, and credit card rates are triple. I don't know about mortgage rates - never had one.

I am the same person, living in the same place, making MORE money than I was back then with a much more stable lifestyle than back then, but the cost of borrowing is a lot higher. How is that justified?

[saras]

8. "It's also what they can get away with." You left this out of the OP. It's the most important part

[emcguffie]

9. I think a mere 30 years ago or so --

-- it could even be much less -- 10% was the highest interest rate allowed in Arkansas. Bill Clinton I think was the one who changed that.

I could be wrong.

[WCGreen]

11. There use to be usury laws in all the states....

North Dakota was one of the first to relax it so that is why so many credit card companies moved to N. Dakota...

[joshcryer]

7. Interest is theft.

That's all that needs to be taught.