Difference in Gross Interest Rates:
The three reasons
which cause variations in the rate of pure interest have
been discussed
difference
in Interest rates and annual percentage rate (APR) .
These causes are also applicable for explaining the
difference in gross interest rates in addition to these
the following two factors also influence the gross
interest.
(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 hot 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
interest rate 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 it's 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.
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