Understanding the real cost of credit and what lies behind interest rates

The interest rate is the first thing people notice when applying for a loan, but it is rarely the whole story.

When someone seeks credit, attention almost always settles on a single figure: the interest rate. That number determines whether a loan feels manageable or immediately out of reach. What is less visible is that this rate is not set the day a person walks into a bank. It starts taking shape much earlier, when lenders decide how much they trust the economy where they are about to place their money.

At its simplest, an interest rate is the price of money. And like any price, it moves with perceived risk. When risk is low, money is cheaper. When risk rises, so does the cost. That adjustment has very real consequences and tends to be felt first by those who rely on credit to keep their daily operations running.

A familiar example helps make this clearer. If you lend money to someone who is organized, pays on time, and explains clearly what they need it for, you do so with relative ease. If there are doubts, delays, or constant changes, you protect yourself by charging more or tightening conditions. At the country level, something very similar happens, except the decisions are made long before any individual applies for a loan.

In Colombia, public debt and how it is managed have been under close scrutiny. According to projections from international organizations, public debt reached around 61.3 percent of GDP in 2024. Beyond whether that figure is high or low, it is a signal markets read alongside other factors, such as the pace of the deficit and the clarity of fiscal planning. “Fiscal deficits and public debt have risen more than expected. The central government’s overall fiscal deficit increased to 6.7 percent of GDP in 2024 from 4.2 percent in 2023, placing it 1.1 percentage points of GDP above the deficit target set by the authorities in the medium-term fiscal framework,” the International Monetary Fund noted in its most recent assessment of Colombia.

Official figures from the Banco de la República place total debt closer to 48 percent of GDP. The difference reflects varying methodologies and the types of obligations included. What matters is not only the size of the debt, but how it is financed and how expensive it is to service.

That cost shows up in the rates at which the government borrows in international markets. In 2025, long-term Colombian government bonds have offered double-digit yields. Put simply, the country has to pay high interest to secure financing. When the state pays more to borrow, it competes for the same pool of money that banks use to lend to businesses and households. That pressure does not stay confined to financial markets. It eventually filters through to commercial, mortgage, and consumer credit.

When confidence matters more than the numbers

This leads to a common question. If inflation is starting to fall, why does credit remain expensive? The answer is that inflation is only part of the equation. Markets also look at fiscal credibility: how reliable the rules are, how clear the accounts appear, and how predictable economic policy is. That assessment happens well before anyone applies for a loan and shapes the rates that eventually reach the public.

When there is uncertainty about fiscal management, lenders become more cautious. Interest rates do not fall at the same pace as prices because perceived risk remains. In these scenarios, the impact is usually felt first not by large investors, but by small and medium-sized businesses, entrepreneurs, and households that depend on credit to sustain or expand their activities.

Comparisons with other countries help illustrate this dynamic. Panama, for instance, also carries a significant debt burden, around 56 to 58 percent of GDP according to official data. Yet it has maintained a more stable and predictable approach to public finances. As a result, markets tend to perceive lower risk and financing costs remain relatively manageable, even in complex global conditions.

This is not about ranking models or denying that any country faces challenges. It is about understanding that confidence is built through clear and consistent signals over time. When those signals are strong, money tends to be cheaper. When they weaken, credit becomes more expensive, often before problems show up in the real economy.

For someone walking into a bank to request a loan, all of this may seem distant. But it is not. An economic environment with weaker fiscal credibility usually translates into higher rates, shorter terms, and fewer financing options. Decisions such as investing in a business, buying a home, or expanding operations depend not only on individual effort, but also on the broader climate of trust in which they are made.

Understanding the cost of credit means looking beyond the number printed on the contract. Behind that rate lie confidence in the economy, debt management, and perceptions of country risk. The next time someone faces a higher-than-expected interest rate, it is worth remembering that this price was set long before they sat down across from a bank advisor. In finance, as in everyday life, trust has a cost. And it is usually paid first by those who need the money most.