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Following factors determined and influence the gross interest rate.

(1) Difference in the Social Status. If a borrower enjoys good-reputation in the society for his honesty and prompt payment of the loan or he can offer good security, then he can get loan at a comparatively low rate of interest.

(2) Difference in Productivity. If the entrepreneur is satisfied that the investment of borrowed capital in a particular enterprise is profitable, then he will be ready to pay higher rate of interest. But if he expects the reward to be low, then naturally he will not be willing to pay higher interest.

Thus, variations in gross interest can also arise due to the difference in productivity.

In the words of Richard:

The gross interest rates charged on individual business is usually determined in personal negotiation between bank and borrower. It reflects such attributes as the borrower’s size and general credit standing, the access to alternative credit sources, the size and the maturity of the loan, the character of the borrower’s business, the value to the bank of his deposit account and of other business relationship and the nature of security, if any, to be pledged.

Definition of Annual Equivalent Rate (AER):

AER stands for Annual Equivalent Rate. It shows you how much interest you would earn if you left your savings in an account to accumulate a year’s worth of interest.

As money will accumulate a certain amount of interest every month, as it is left in an account, over the course of a year you end up earning interest on top of that interest. This is known as compound interest. The figure quoted as ‘AER’ on a savings account is calculated from the rate of interest earned over a year, including this compounded interest.