# What Is The Main Difference Between The Real And Nominal Rates Of Interest?

The real rate of interest is the growth in the power of the consumer to consumer over the entire life of a loan.

As for the nominal rate of interest, it is the number of monetary units paid per unit borrowed. It is the overt and observable market rate of interest, which holds the ultimate point of consideration for financial institutions and the public equally.

In the absence of inflation, the real and the nominal rates of interest are the same. However when the menace of inflation exists in a society, its presence causes a number of things to change, which includes the nominal rate of interest. In the presence of inflation, it is imperative that the nominal rate of interest exceeds the real rate of interest. The simple logic behind this theory is that the lenders demand a deserving increase in premium from the borrowers (which is definitely above the real rate) to compensate for the expected loss in the purchasing power of the principal amount that they have lent as well as the interest amount.
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