We present a study on interest rates and their effects on Loans. Having described interest rates as
money charged by a lender to a borrower for its use, we use thus to examine the influence of interest
rates on loans. Our Literature review discusses factors that affect interest rates and the effect of
intereston loans. We follow Mennis’s description of the behavior of interest rates when he outlines the
factors that influence future movements of interest rates in the United States of America. We also look
at the financial markets in Zambia and review their underdevelopment and inequalities in the interest
rates charged on loans and that paid on cash deposits by commercial banks.
We highlight the methodology we use in examining the effect of interest rates on loans using the
ordinary least squares. Our results for this test leads us to conclude that as interest rates go up fewer
loans would be contracted.
Finally we recommend that authorities should pursue policies that reduce risk on loans and help
maintain low levels of inflation in order to maintain competitive rates of interest in an economy.
Keywords : Gross Domestic Product, Inflation, Interest rates, Linearity, Loans, Randomization, outlier.