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Time preference theory of interest

In economics, the time preference theory of interest is the idea that interest is the price that borrowers put on having money now rather than having money later.

This interest rate may be set by the chance of making profit, the estimated inflation, the preference of owning rather than renting an asset or simply a high time preference with consumption.

There is no attempt to link this with marginal production and it rejects the idea that interest is by its nature exploitative.

The theory with its stress on the marginal utility of the loan rather than any use to which it can be put suits the Austrian School's analysis, although other economists also apply this theory.

See also: time value of money