An interest rate is a rate that is charged on a loan or a rate given for a deposit to a bank that is a percent of the total money amount. Excess interest rates are called usury and are against the law. However, an interest rate that was considered as usury 50 years ago, is now "the new normal". Financial institutions can usually charge interest rates that are greater than individuals can charge when they make private loans to other individuals or via credit cards.
Interest Rates of Bank Deposits
While banks can charge fees for services, mostly people depositing money in a bank will seem to see the amount of that money slightly increase over a long time due to interest rates that the bank will pay. However, for several years now the inflation rate (see also Consumer Price Index) is greater than the interest money paid by the banks, thus one actually loses money compared to investing in tangibles or inflation hedges. For example, a good or service costing $1000 in 2004, the same item would cost $1,242.89 ten years later in 2014 due to the cumulative rate of inflation of 24.3% over those ten years.
Banks can also offer certificates of deposit where the money is tied up for a set length of time earning a set interest rate. Generally speaking, the longer the period of time the money is tied up, the greater the interest rate it will earn. But again, it is better to invest in tangibles due to the low interest rates offered by the banks compared to the actual cumulative inflation rate. However while being a hedge against inflation, tangible property, such as productive farmland, food and water storage, precious metals, firearms, and ammunition do not necessarily have the same rapid liquidity and fungibility as fiat currency.
Interest rates can be either fixed (fixed rates) or they can change (adjustable rates). Rates on savings and checking accounts in a bank will usually change over time whereas a certificate of deposit will usually have a fixed rate for the life of the contract.
- ↑ http://www.usinflationcalculator.com The US Inflation Calculator measures how the buying power or purchasing power of the US dollar has changed over the years by using the latest Bureau of Labor Statistics (BLS) inflation information provided in the Consumer Price Index (CPI). http://www.usinflationcalculator.com/frequently-asked-questions-faqs/#HowInflationCalculatorWorks Accessed April 6, 2014
- ↑ Shifting to Tangibles in an Age of Inflation Accessed April 6, 2014