Consumer Rates

You are unlikely to get Base Interest Rate from a bank. Why would a bank borrow from the Central Bank money at a specific rate to allow you later to borrow from them at the same rate? How would they benefit? They need to make money, so you can actually get two rates – borrowing rate and deposit rate

The borrowing rate is usually higher than the deposit rate, which means you will get less money when you deposit your funds with the bank (lending to the bank) than when you borrow from the bank. Banks need to earn their money, and they do it on the spread – or the difference between the borrowing and lending rate. 

For example, you deposit $100 for a year at an annual interest rate 5%, this is the bank’s deposit rate and for you your rate of return on deposited money. After a year bank pays you back $105 ($100 deposited +$5 interest). As your money is with the bank, they do not lie around idle, they work to create more money. Kevin, for example, needs to borrow $100 from the same bank, and she needs to pay 10% interest rate for this borrowing. This is the bank’s borrowing rate and cost of obtaining capital for Kevin. After a year Kevin returns $110 to the bank. You see, by using your money bank just earned $5 ($110 obtained from Kevin – $105 they returned to you). This is the money the bank made on the spread between two interest rates.

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