<p>You have the right intuition.</p>

<p>However, 1% is usually the real interest rate. </p>

<p><em>Real interest rate = nominal interest rate - inflation</em></p>

<p>So, you are actually, usually, paying a 3% annual rate.</p>

<p>If that is not the case, your question does not specify if 1% is nominal or real, then just having inflation of x% does not mean that you are increasing your wealth my that much each year. </p>

<p>Example: Inflation is 10%. The best investment opportunity provides a return of 0.5%. By the end of the year, I am still losing 9.5% of my wealth. But does that mean that I should not invest at all? If I don't then I will lose 10% which is wrose.</p>

<p>I hope that helps.</p>

CC BY-SA 4.0
2019-05-09T17:21:30.737Z
2019-05-09T17:21:30.737Z
Student
<p>&quot;Real interest&quot; means the interest after subtracting inflation. Interest including inflation would be called &quot;nominal interest&quot;.</p>
<p>If inflation is 2%, then 1% real interest means 3% nominal interest, which is the interest that is written in the loan contract and is what you actually have to pay. You would have to pay \$300 interest on a \$10000 loan. However, if you put the \$10000 into a savings account that matched inflation, you would have \$10200 at the end of it. So you would have lost \$100 overall.</p>

CC BY-SA 4.0
2021-06-02T08:13:40.353Z
2021-11-04T14:32:01.350Z
2021-11-04T14:32:01.350Z
Criticize SE actions means ban
<p>Inflation: 2%
Interest:  1%</p>

<p>This means the real rate is 3%. 
So no; not free money. </p>

<p>Free money would be negative interest rates. 
Example: Inflation: 0%.
         Interest on loan I get from the bank: -1%.
This would mean they are paying ME 1% to take the loan from the bank.</p>

<p>Negative interest rates are a real practice, with many historical examples that can be researched.</p>

<p>The banks are theoretically losing 1%(+2% inflation) on the loaned amount, however it's important to understand that deals are made among negotiations with central banks in the background that can still produce gains from this.   </p>

CC BY-SA 4.0
2019-05-09T17:16:17.283Z
You are taking his question in the wrong way. Please see my answer below.
Student
CC BY-SA 4.0
2019-05-09T17:43:43.507Z
You repeated my answer but said it differently.
Clinical_Coder
CC BY-SA 4.0
2019-05-09T20:01:21.120Z
Not really the same but I guess it works
Student
CC BY-SA 4.0
2019-06-10T00:29:28.817Z
If inflation is 2% and nominal interest is 1%, then the real interest rate is -1%.
Acccumulation
CC BY-SA 4.0
2019-06-10T18:06:15.527Z
Sorry but that is not correct, you do not subtract them, you add them for the real interest rate. If I take a loan out from the bank at a nominal interest rate of 1%, and inflation is 2%, then I'm effectively paying 3%. The bank's return on the loan however is -1%.
Clinical_Coder
CC BY-SA 4.0
2019-06-10T20:52:37.347Z
Effectively, everybody loses the 2%, but the bank then makes 1% back off you.
Ask About Monica
CC BY-SA 4.0
2019-06-12T13:56:04.323Z
Yes, that is correct.
Clinical_Coder
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2020-10-02T14:31:47.913Z
@Acccumulation Yes but the question says 1% real interest which means 3% nominal interest.
Criticize SE actions means ban
CC BY-SA 4.0
2020-10-02T21:14:31.500Z
@user253751 This answer says "Inflation: 2% Interest: 1%

This means the real rate is 3%." Saying that the real rate is 3% is wrong. (And technically, the rates are multiplied, not added).
Acccumulation
CC BY-SA 4.0
2019-05-08T13:53:49.337Z
2019-05-08T13:53:49.337Z
Clinical_Coder
<p>Suppose we have an inflation in a country with an annual 2% and we get a loan for an annual 1% (real interest). Is the money we receive free? 
This is a common practice in some European countries, where the mortgages are around 1% fix rate plus the Euro Interank Offered Rate.
If so, why? Are the banks loosing money by lending in such low rates?</p>

CC BY-SA 4.0
2019-05-08T21:36:30.623Z
Is the interest of $1\%$ real or nominal?
Regio
CC BY-SA 4.0
2019-05-09T17:23:14.680Z
Please accept the answer if it was helpful
Student
CC BY-SA 4.0
2019-05-10T01:21:02.310Z
To be clear, we are talking about an interest rate = EURIBOR + 1%?
dismalscience
<inflation><interest-rate>
Is a loan lent with a rate under the inflation rate free money?
Hipocoro
# Is a loan lent with a rate under the inflation rate free money?

(Asked by: username_0 on 2019-05-08)

Suppose we have an inflation in a country with an annual 2% and we get a loan for an annual 1% (real interest). Is the money we receive free?
This is a common practice in some European countries, where the mortgages are around 1% fix rate plus the Euro Interank Offered Rate.
If so, why? Are the banks loosing money by lending in such low rates?

**Tags:** inflation, interest-rate

> **Comments:**
> **username_1**: Is the interest of $1\%$ real or nominal?  
> **username_2**: Please accept the answer if it was helpful  
> **username_3**: To be clear, we are talking about an interest rate = EURIBOR + 1%?  

---

## 3 answers

### Answer by username_2 on 2019-05-09. Score: -1

You have the right intuition.

However, 1% is usually the real interest rate.

*Real interest rate = nominal interest rate - inflation*

So, you are actually, usually, paying a 3% annual rate.

If that is not the case, your question does not specify if 1% is nominal or real, then just having inflation of x% does not mean that you are increasing your wealth my that much each year.

Example: Inflation is 10%. The best investment opportunity provides a return of 0.5%. By the end of the year, I am still losing 9.5% of my wealth. But does that mean that I should not invest at all? If I don't then I will lose 10% which is wrose.

I hope that helps.


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### Answer by username_4 on 2021-06-02. Score: -1

"Real interest" means the interest after subtracting inflation. Interest including inflation would be called "nominal interest".

If inflation is 2%, then 1% real interest means 3% nominal interest, which is the interest that is written in the loan contract and is what you actually have to pay. You would have to pay \$300 interest on a \$10000 loan. However, if you put the \$10000 into a savings account that matched inflation, you would have \$10200 at the end of it. So you would have lost \$100 overall.


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### Answer by username_5 on 2019-05-08. Score: -2

Inflation: 2%
Interest: 1%

This means the real rate is 3%.
So no; not free money.

Free money would be negative interest rates.
Example: Inflation: 0%.
Interest on loan I get from the bank: -1%.
This would mean they are paying ME 1% to take the loan from the bank.

Negative interest rates are a real practice, with many historical examples that can be researched.

The banks are theoretically losing 1%(+2% inflation) on the loaned amount, however it's important to understand that deals are made among negotiations with central banks in the background that can still produce gains from this.

> **Comments:**
> **username_2**: You are taking his question in the wrong way. Please see my answer below.  
> **username_5**: You repeated my answer but said it differently.  
> **username_2**: Not really the same but I guess it works  
> **username_6**: If inflation is 2% and nominal interest is 1%, then the real interest rate is -1%.  
> **username_5**: Sorry but that is not correct, you do not subtract them, you add them for the real interest rate. If I take a loan out from the bank at a nominal interest rate of 1%, and inflation is 2%, then I'm effectively paying 3%. The bank's return on the loan however is -1%.  
> **username_7**: Effectively, everybody loses the 2%, but the bank then makes 1% back off you.  
> **username_5**: Yes, that is correct.  
> **username_4**: @username_6 Yes but the question says 1% real interest which means 3% nominal interest.  
> **username_6**: @user253751 This answer says "Inflation: 2% Interest: 1%  This means the real rate is 3%." Saying that the real rate is 3% is wrong. (And technically, the rates are multiplied, not added).  

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