There are substantial amount of loan markets, which often consist of consumer loans, corporate bonds, or mortgages, as well foreign loans. Each low market will have their own respective interest rate which fluctuates during a given period of time. These interest rates often depend on supply and demand relationship much like the prices of food with other food products. Interest rates will increase if demand for a loan increases, or the available amount of money allowed for loans substantially decreases. When interest rates are smaller, individuals will become more willing to borrow because these loans will cost them less than other supply and demand of loans which can be impacted by several factors, for example, inflation, government policy, the length of any given loan, economic activity, and the degree of risk.
Government policy: when a government increases or decreases the nation’s money supply the government is directly influencing the interest rate. The nation’s government will often do this through the central bank, which is usually the independent government agency that operates within the nation. For example, the United States, they have the Federal reserve system. This Federal Reserve System directly influences interest rates within the nation by making it mandatory that all U.S. banks place aside a specified percentage of their deposits or receivables, on reserve. The banks on the other hand may use their remaining amount of money for issuing loans.
Inflation: during times of inflation, prices will increase throughout the country’s economy. At any specified amount of time, the money used to purchase items will decrease in value. During these times banks, or lenders, will attempt to safeguard their incomes by increasing interest rates. During these times there are fewer people who are able to save money, and therefore these lending institutions will have lesser money to loan.
Economic activity: when a country’s economic activity increases, that is to say when consumers purchased more than they previously had. Businesses will expand their production and output. During this they may purchase new equipment or improve the supply of raw materials that they currently have on hand. They will do this to help finance their expansion, and thus they borrow more money.
Length of a loan: in many cases a loan, or money may be borrowed for many years or even just for one day. In many cases an institution will lend each other money for just a few days, whereas mortgages may be issued for. Of up to twenty to 30 years. Short term loans are issued and expected to be paid back within a year. Intermediate term loans cover a period of one to five years, as where long-term loans are expected to be paid back within five years. For short term loans interest rates are substantially lower than those rates that are charged for long-term loans for a multitude of reasons.
Degree of risk: the creditworthiness of the loan borrower directly impacts the interest rate charged by the lending institution. This is used to calculate the probability in which the loanee will be able to pay back their loan.