What is the difference between the nominal interest rate and the actual interest rate?

The difference between the nominal interest rate and the actual interest rate is the analysis of profitability for the creditors' creditors. The nominal interest rate is the determined loan rate. It is the amount of interest that the borrower pays until the retirement loan is. The actual interest rate is calculated by deducting the expected inflation rate from the nominal interest rate. Nominal interest rates are static, while the actual rates are smooth and dependent on the external factor.

Interest is the cost of lending money. From the creditor's point of view, it is the amount of profit that receives its money from allowing the debtor to use his money. However, profit is the concept of fluid. What can be considered as profitable today can be unprofitable tomorrow in other circumstances.

The creditors set an interest rate when the loan is provided. This rate is called a nominal interest rate and reflects a fixed rate of return for a lifetime. However, the amount of interest may not be as the future is valuable for the creditors if the cost of living becomes more expensive. If the towerToday he receives $ 100 (USD) and can buy 100 hamburgers, but in the future he can only buy 75 hamburgers for the same amount of money, this money has become less valuable. In this scenario, the fact that someone else holds the creditor's money suddenly became less profitable.

This change in the value of money is the degree of inflation. Inflation is often measured by the increase and decline in the economic index, such as the Consumer Price Index (CPI) in the US, which monitors consumer goods prices over the baseline. The basic difference between the nominal interest rate and the actual interest rate is that the real interest rate for inflation. In practice, the expected inflation rate is deducted from the nominal interest rate in the future years to determine the real profitabv of that time of the loan.

For example, a five -year loan has a 10 % nominal rate, but in the fourth year, inflation is expected to increase by three percent. In the year when the influencies rateCe is changing, the actual interest rate changes. The actual interest rate this year would be seven percent, so the loan would be less profitable for creditors. In this example, the difference between the nominal interest rate and the actual interest rate in the fourth year is three percent.

estimating future inflation is speculative. There is no certain way to determine what the inflation rate will be in any future year. The creditors must charge sufficient interest to ensure that the loan remains profitable, against any possible change in inflation. Once the inflation rate is equal or exceeds the nominal interest rate on the loan that is no longer achieved at the transaction. This is why some loans are associated with CPI and set to a variable rate that is a CPI plus rate.