Question

Chloe has a​ $15,000 personal loan at a nominal interest rate of 8 percent. If the inflation rate is 3 percent what is the real interest rate paid on the​ loan?

Answer 1

Answer:

5 percent

Explanation:

The nominal interest rate is defined as the interest rate before adjusting for inflation. It is the interest rate stated by lenders when issuing out loans. Inflation erodes the strength of a currency. For depositors to profits from their savings, the nominal rate must be greater than the inflation rate.

The difference between the nominal rate and the inflation rate is the rear rate of return. The rear rate is the actual gain or the cost of borrowing or savings. For chloe, the real rate is the amount the lender will be earning from the personal loan advanced to her. It is the nominal rate adjusted for inflation. The rate is 8 percent, minus 3 percent.