Interest rates play critical roles in our personal and business lives. They determine how much debt costs, how much we earn from investments and how much we can save to meet our financial goals. Understanding how they work and what to do when they rise or fall can help you make smarter choices with your money.
An interest rate is a percentage of the amount owed or borrowed that lenders and creditors charge or receive. Lenders typically use a variety of factors to decide on the interest rate they will offer, including their own assessment of your creditworthiness and other data about the economy. In general, the longer the term of the loan or debt, the higher the rate, reflecting the increased risk of default.
When interest rates are low, they encourage more people to borrow money and spend on consumer goods. This can stimulate economic growth and job creation. However, when they’re too high, they discourage borrowing and can slow economic expansion by increasing the cost of loans and debt to businesses.
In addition, the high cost of credit can discourage consumers from spending or saving, making it harder for them to reach their financial goals. High interest rates also reduce the profitability of certain investments, such as real estate and long-term bonds. This can create investment opportunities for the patient and selective investor.
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