Interest rate cap and floor
Okay kiddo, let's talk about interest rates. Have you ever heard the word "rate" before? It means how much something costs or how much you get paid. For example, if you get paid $5 for every hour you work, that's your rate.
Now, imagine you want to borrow some money from the bank. The bank will let you borrow the money, but they will also charge you extra money for borrowing it. This extra money is called interest.
An interest rate cap is like a limit that the bank puts on how much interest they can charge you. Let's say the cap is 10%. If the bank tries to charge you more than 10% interest, they are not allowed to do so. It's like when your parents tell you that you can't have more than one cookie. The interest rate cap is like a cookie limit for the bank.
On the other hand, an interest rate floor is like a minimum amount of interest the bank will charge you. Let's say the floor is 5%. If the interest rate drops below 5%, the bank can still charge you 5% interest. It's like when your parents tell you that you have to eat at least one vegetable with your dinner. The interest rate floor is like a vegetable requirement for the bank.
Interest rate caps and floors are put in place to protect people who borrow money from the bank. They help make sure that the interest rate doesn't get too high or too low. It's like having rules in a game to make sure everyone plays fairly.
Now, imagine you want to borrow some money from the bank. The bank will let you borrow the money, but they will also charge you extra money for borrowing it. This extra money is called interest.
An interest rate cap is like a limit that the bank puts on how much interest they can charge you. Let's say the cap is 10%. If the bank tries to charge you more than 10% interest, they are not allowed to do so. It's like when your parents tell you that you can't have more than one cookie. The interest rate cap is like a cookie limit for the bank.
On the other hand, an interest rate floor is like a minimum amount of interest the bank will charge you. Let's say the floor is 5%. If the interest rate drops below 5%, the bank can still charge you 5% interest. It's like when your parents tell you that you have to eat at least one vegetable with your dinner. The interest rate floor is like a vegetable requirement for the bank.
Interest rate caps and floors are put in place to protect people who borrow money from the bank. They help make sure that the interest rate doesn't get too high or too low. It's like having rules in a game to make sure everyone plays fairly.