Comparison of Interest Rates Requires a Common Scale

Subject: Finance
Pages: 2
Words: 325
Reading time:
2 min

Interest rate is a very powerful economic variable in macroeconomic theories. According to Robert Johnson and Patricia Kuby, interest rates play very fundamental roles in determining preferences for liquidity and investment decision. There are different types of interest rates including variable rates, fixed rates, partially fixed rates, and introductory notes. This section provides an argument that comparison of interest rates requires a common scale.

Currently, the stiff competition among financial institutions has given customers a wide range of factors to take into account before taking up loans, favorable interest rate being one of the major factors. Customers, therefore, must compare various options available for them from different lenders; consequently, it is only through comparison that these customers would be able to pick up the best deal in the market. Besides, borrowers must understand that loan market is made of exceptionally greedy credit providers who are only out to make massive profit from them, and not look out to help them with choosing the best option.

However, it is extremely difficult to compare interest rates because many credit providers often use their own scales when setting up their interest rates. For that reason, borrowers are often put in a difficult situation of picking the best loan with favorable interest rates. Most of the lenders, therefore, end up seeking financial advisors help before choosing loans with favorable interest rates. However, this process can considerably delay transactions in the financial market as buyers consumes a lot of time consulting the third party before choosing the best option. Therefore, if the credit providers use a common scale, customers will be able to make quick comparisons and consequently speed up the transactions in the financial market.

Conclusively, the use of a common scale for comparison can help customers make the better choice when choosing the best option. Credit providers, therefore, are obliged to use a common scale.