Definition of Interest Rates

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The interest rate is the amount that a person pays back over and above the principle that has been borrowed from a lending institution. Learn how interest rates are defined by the profit banks are making on the money they've lent with help from a financial specialist in this free video on interest rates and loans.

Part of the Video Series: Interest Rates
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Video Transcript

Hi, this is Matt McKillen with Innovative Financial Group. Question posed to me today is what is the definition of an interest rate? Well it's very simple, the interest rate is the amount you payback over and above the principal that you borrow from a lending institution. For example, if you pay, if you borrow 10,000 dollars at an agreed rate of let's say 8%, that 8% is the profit that the bank is making over the life of that mortgage for lending you the money to begin with. Now most banks also borrow the money that they lend to you so they may be borrowing that money at 3% from the federal reserve for example and then they're turning around and offering it out to you as a consumer for maybe 6 or 7%. So the difference is 3 to 4% profit for the bank over and above what they're paying on the money that they're lending to you. So interest rate again is basically defined by the amount of the profit that the bank is making on the money that they lend you over and above the principal. My name is Matt McKillen, I'm with Innovative Financial Group.


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