Interest is simply the cost of borrowing money. As with any good or service in a free market economy, price ultimately boils down to supply and demand. When demand is weak, lenders charge less to part with their cash; when demand is strong, they’re able to boost the fee, aka the interest rate. Demand for financing ebbs and flows with the business cycle. During a recession, fewer people are buying cars or houses (and therefore looking for new mortgages or auto loans) or seeking financing to start up or grow businesses. Eager to increase lending, banks put their money “on sale” by dropping the rate.

