What is an interest rate?
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Interest rates have been around since the dawn of civilization. The current Federal Reserve interest rate is between 4.75% and 5.00%. That’s high compared to the last 25 years in America. However, it is low compared to the world history. Here are some historical comparisons of interest rates to show you what we mean:
- Mesopotamia, c 3000 BC: 20%
- Persian conquest (King Cyrus takes Babylon), 539 BC: rates of 40+%
- Rome: 1 AD: 4%
- Italian cities, c. 1150: 20%
- Holland, beginning of the Eighty Years’ War, 1570s: 8.13%
- US, West Florida annexed by the US, 1810s: 7.64%
Interest rates are important when you are taking out a loan to buy a house or investing in an IRA. But do you know what an interest rate actually is? And why it matters?
Furthermore, how should Christians feel about interest rates? Let’s take a look at these questions.
What is an interest rate?
Simply stated, it is the basis for establishing a cost of money based on risk of return. For borrowers, it is the premium charged for someone providing you with a loan of money. For an investor, it is how much an individual or institution will pay you for loaning them money.
Why does it matter?
Interest rate matters because it sets a standard of value. If Bank A will pay you 1% and Bank B will pay you 5% then either Bank A has little value for your money OR Bank B is a risky place to put your money. If you are a borrower and Bank A charges you 3% and Bank B charges you 7% for money to buy a car, then Bank A believes there is little risk of being repaid. Bank B either believes there is a lot of risk in loaning you money or it doesn’t have as much to loan.
Who should care?
As Christian stewards, everyone should care. We are entrusted with life’s resources by God. How we manage those resources to God’s glory is what our expectation is. We are not to be like the foolish person who buried his money in the ground because he was afraid of the master’s wrath.
Economically, spending less for money borrowed and receiving more for money invested is common sense. However, one cannot ignore the risks.
Would you like to know more about loan and investment options at LCEF?
Check out our interest rates on loans or investments.
