People have to pay a higher interest on loans than the interest they receive on a
fixed deposit for the same time-period. Why do you think this is so?
SCERT Telangana Class 8 Social Science Ch 7 Money and Banking
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People pay higher interest rates on loans as some risk is involved there. When a bank pays an interest on deposit, it means that the bank is effectively borrowing at that rate. When the bank lends the same money it needs to have a spread which should be a little higher than the interest paid on the deposit. This difference will cover the cost of operating the bank and also the risk premium of engaging the bank in a loan transaction.Thus both rates are related to each other.
Answered by
118
People pay interest as they take loans. On the other hand, people receive interest on fixed deposit for the same period. The interest taken on loans is turned to interest given to fixed deposits. Both are co-related. The interest is higher because banks circulate these money for its functions.
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