Cost of money

What is Cost of money?

When banks lend money, they impose an interest on borrowers in an either explicit or implicit way. It is their way of making money. Cost of money includes interest as well as any charges and fees. Since inflation devalues the currency, the final cost of money equals the interest and fees charged minus inflation. For example, if the interest rate constitutes 4 percent without any fees at the inflation rate of 3 percent, the cost of money is 1 percent.



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