Interest rates have a huge impact on our daily lives, from how much it costs to borrow money for things like credit cards or mortgages, to how much we earn by depositing money in banks. Understanding how they work can help us make smarter financial decisions.
Interest Rates
When interest rates are low, it can encourage more borrowing and spending by consumers and businesses, boosting economic growth. However, higher interest rates can restrain such borrowing and help prevent inflation or other undesirable consequences. The Federal Reserve sets interest rates to balance these concerns and pursue its mandated goals of maximum employment, stable prices and moderate long-term interest rates.
The type of debt is one factor that influences interest rates. For example, mortgage loans tend to have lower rates because they are secured by a property, allowing the bank to take possession of it and sell it to reduce losses in the event that borrowers default on their debts. Credit card debt and personal loans, on the other hand, are often not secured and may be more risky for lenders to lend to.
Individuals can also influence the interest rates they pay by shopping around and negotiating with lenders. They can find better rates by analyzing their credit reports and bank statements, which will help them determine what kind of lender they should seek out for each loan they need. They can also learn to differentiate between the interest rate quoted by a lender and its annual percentage yield, which takes compounding into account.