Interest rate: what the cost of money and what is its relation to inflation

1. What is the interest rate?

It is defined as the cost of money. That is, what is the interest that makes me resign today to consume a good later. On the other hand, what is the rate I am willing to promise to pay in the future so that the money is granted to me today. The interest rate is considered active in the case of being a creditor (for the bank it is an active rate to grant a loan or credit, for which it receives interest). And, on the contrary, your passive rate will be the one you pay for a fixed term to those who deposit their pesos in your entity.

2. And what do I care?

If I want to buy some good today but I don't have all the money right now, I can ask for a loan. The entity that lends me the money will give it to me in exchange for an interest that is attractive enough not to have the money today. That value will depend on several conditions. First of all, you should make sure you charge a higher value of what it means to finance yourself, that is, what you pay your clients to deposit their money there, in addition to their respective costs. The rate can be fixed or variable. The decision to adopt one or the other will depend on what is considered to happen with inflation going forward. For example, if the rate is fixed and 20% per year but inflation will be 50%, it will be a good opportunity to take that money, since my salary should be adjusted in a similar way to inflation (historically this is the case). On the contrary, if the rate is above, I will be losing money compared to what I borrowed. The variable rate will adjust with inflation and, if I consider that it will decrease, it is also presented as an attractive option. On the contrary, if it accelerates, it will exceed my salary and harm my power to repay that debt.

3. What to watch?

When it comes to borrowing money, it is important to understand what we are being charged. The first thing in sight is the TNA (annual nominal rate), which will determine how much we will be charged only as an interest, that is, the cost of money. Then we will find the TEA (annual effective rate), which will be higher, given that it considers the capitalization of interest. Finally, and the one that matters most, will be the Cftea (annual total effective financial cost), where we will find the true cost of taking that money. Here, VAT, stamp tax, credit evaluation expenses and risk insurance are added to the effective rate.

4. The hidden interest

In high inflation economies such as ours, liquidity becomes enormously important, given that, as time passes and remains static, money constantly loses purchasing power. Therefore, when we see a list price of $ 100 and they tell us that by paying it in installments there will be no interest, but at the same time they offer us a discount if we pay it in cash, so that means that there is an implicit interest, that It is reflected in the difference between the price in installments and the immediate price.

5. Recommendations

If inflation is high, rates have to be too. Therefore, the ideal will be covered in different ways. As savers, the option is to use high interest rates in our favor to invest in instruments that return an interest that allows us to maintain our constant purchasing power (fixed term, bonds, bills, UVA), in addition to charging our work as quickly as possible to be able to act before it is devalued. In our role as consumers, the way is to look for interest-free installments or to pay in cash (depending on our financial situation), buy non-perishable products and never, but never, pay only the minimum of the card: the interests that run for what is not subscriber will sweep our account.

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