1 88 AGRICULTURAL ECONOMICS 



adjust the supply of funds this costs something which must be 

 added to the interest rate. The interest rate tends, therefore, 

 to be lower in a region where there is a surplus of savings than 

 in a region where there is not enough local saving to care for 

 the needs of investors. 



Risk. The fact that some loans are safer than others is 

 legitimate ground for differences in the interest rates. If there 

 is any chance of losing the principal, a certain amount of in- 

 surance is added to the interest rate to compensate the money 

 lender for taking this risk. It often happens that lack of knowl- 

 edge on the part of the lender makes him assume the risk is 

 great where it is really small. Credit associations, made up of 

 farmers who know each other, can reduce greatly the amount 

 of risk by eliminating the dangerous loans, and by carrying for 

 themselves the risk which would otherwise fall upon the money 

 lender. This is one reason the credit association can borrow 

 at a lower rate than can the individual members of the asso- 

 ciation. 



Interest and the purchase price. It frequently happens 

 that the rate of interest upon deferred payments is fixed as 

 a part of the bargain in the sale of a farm. For example, a 

 retired farmer sold his farm and took a mortgage for $12,000 

 at four and one-half per cent annual interest. When asked by 

 the writer why he made the interest rate so low, the reply was, 

 " Well, I was getting a long price for the farm." Often the 

 buyer who may have been in the habit of paying rent, thinks 

 especially of the amount he will have to pay in interest each 

 year. A desire to keep this amount low may result in paying 

 too high a price for the farm if he is favored by a low interest 

 rate. The purchaser should keep both sale price and interest 

 rate in mind when making the bargain. Otherwise what seems 

 to be a low rate of interest may be a very high one. 



Terms of payment. The purchaser may better afford to 

 pay a somewhat higher rate of interest if he has the privilege 

 of making partial payments whenever he has some money, 

 rather than to borrow at a lower rate for a long period, say five 

 years, with no chance to make payments until the note is due. 



