Return rur Inconvenience.

A CAller has to suffer certain inconveniences for which he seeks compensation in the form of interest. When a man lends money, he loses command over it for a period. He is unable to make use of it for himself, if he wants to. Favourable opportunities for its investment may also slip hy. Inconvenience is of two types: The lender may not get back.the money when he needs it and he may have to borrow from others on interest. Or. he may get the money when he cannot find for it some safe and remunerative investment so that the money lies idle and he loses interest. He must, therefore, compensate himself for such losses. Hence. he charges something extra over and above pure or net interest. . Keeping, these facts in mind. it will become clear why the village money-lender’s rates of interest arc high in spite of competition among the lender. This is  due to the fact that he faces greater risk and inconvenience. Similarly. the pawn-brokers seemingly charge very high rates when calculated on an annual basis. But they have to undergo a lot of trouble in their business in keeping small individual accounts, etc. This also explains  why governments, especially those with . , sound financial traditions, can borrow at extremely low rates of interest. Here the risk and inconvenience to the lender are negligible and the interest paid is mainly “pure interest”. The return on government securities is an example of pure rate of interest.

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