Personal Loans

This entire quarter I have been taking Business-Finance 220 and have noticed several economic principles presented throughout the course. Just recently we began discussing loans and the types of loans that are available and the different places one might receive a loan. Because of the credit crisis and recent recession it is more difficult than ever to receive a loan without a considerable credit score. I learned something I never knew before from this lecture, which is that even when loaning or borrowing money from an individual, such as a friend or relative, interest must be paid to the individual making the loan. It seems idiotic at first that you cannot borrow from a friend or relative without having to pay an interest rate. However, as our professor put it the person loaning the money must be compensated for their opportunity cost of possibly receiving a better return on their money elsewhere in the market, for example the stock market (probably not today though). The government even goes so far as to set the exact interest rate that must be charged by an individual providing the loans and my professor believed it to be right around 8.5%. The same is true for banks when providing loans or any institution charging interest. Interest that is earned must be payment for the loan provider because it must exceed their opportunity cost to invest their money elsewhere and get a possible better return in the market.