A good way to conceptualize the cost of borrowing money is to annualize interest rates, which offers an easy way to compare loans of varying maturities. One trend you’ll notice is that loans with longer maturities generally require higher interest rates. What is the rationale behind this trend? Salman Khan of the Khan Academy explains.
From this video, you will understand:
- Why long term borrowing tends to demand higher interest rates compared to short term
- How risk factors in to higher interest rates on loans