12:20 27 July 2013
According to recent studies, 5per cent of families have now resorted to expensive payday loans. A further 3per cent out of the above 5 makes use of pawnbrokers.
Little did they know that the use of high cost credit for essentials can be a fast way to financial misery because with time, they may get stuck in piled up debts when excessive interest charges on those funds might leave them with reduced cash to spend every month.
The rate at which interest is paid by borrowers for the use of money they borrow from a lender is called interest rate. This interest rate is a percentage of the actual principal paid continuously for the period of time in which the money is borrowed.
A practical example is when a small company borrows capital which it needs to run its business from a bank, now this money cannot be used by the bank for business because it is already lent to a company.
In order to cover up for the inability of the bank to use this money, a percentage of it would be paid for as long as the money remains in the company’s possession. This small percentage is known as the interest rate.
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