# Lending and borrowing constraints

Borrowing money today affects the amount of money available to you in the future.

Say that you want to borrow $50 to buy new shoes. You take a loan with a 10% annual interest rate to be paid back a year from now.

While your ability to consume has increased right now, you have to consume less in the future. Why?

In a year from now, you have to pay back the $50 that you borrowed plus $5 in interest. If you make $100 in the future, you will then have only $45 left to spend.

If the rate were 20%, you would have to pay back the $50 principal plus **$10** interest.

**Higher**interest rates make it**more expensive**to borrow.**Lower**interest rates make it**less expensive**to borrow.

### How to pay back a loan

- Decide how much you want to borrow (\(B\)). Letâ€™s say for this example it is $50.
- Look at the interest rate (\(r\)). For this example, the interest rate is 10%.
- Calculate the total amount you will need to pay back given the amount borrowed and the interest rate.

### Exercise

Suppose you expect to have $840 in your bank account in one year. What is the maximum amount you can afford to borrow right now at a 20% interest rate?

- If r = 20% and we expect to have $840 in the future, we can only borrow $700 at most.
- If r = 20% and we expect to have $840 in the future, we can only borrow $700 at most.
- If r = 20% and we expect to have $840 in the future, we can only borrow $700 at most.