Interest is a fee paid by someone who borrows money from another person or entity. An interest rate is the specific amount of money that the borrower pays. Interest rates can influence almost anything related to the economic system. For example, they can influence the cost of borrowing money from banks and financial institutions, the return on your savings, and are an essential part of many investments’ total return. Read on if you want to learn more about how interest rates continue to be an important factor in our lives.
The Importance of Interest Rates
As you already know, interest rates are prices you have to pay when you borrow money or, if you’re a lender, they are payments you receive when you lend money. They are also generally shown in percentage form. So interest rates are a specific percentage of the total amount of a loan that you must pay each month or year you have to pay (if you’re a borrower) or receive (if you’re a lender). So, for instance, in a 200-dollar loan situation with a 10% interest rate, the borrower would have to pay the lender 20 dollars at the end of the year.
Interest rates are among the most important numbers in the economy because they influence how likely people are to borrow money. You should know that it’s more expensive to borrow money if interest rates are high. When they’re low, it’s much cheaper to borrow. Starting a new business endeavor or buying a new house are some reasons why people want or need to borrow money from banks and other lenders. Such investments can trickle on toward the economy and boost wages and job growth. Remember, if you’re borrowing money from a bank or an alternative lender, always get a loan at the lowest interest rate. Whether it’s a personal loan Philippines, personal loans can have high-interest rates ranging from 10 percent to 20 percent. So even a small drop in interest rates will greatly affect overall loan costs. Also, going for low monthly payments over a longer repayment period will often come with higher interest rates.
Economists and people like you and I can become obsessed with interest rates. These rates can be thought of as big buttons that can either trigger lots of investments with low rates or slow things down with high rates. So, who or what gets to decide interest rates and their fates? There are a few economic theories. As with most things economy-related, supply and demand play a significant part, but also the number of people eager to get loans and amount of lenders willing to lend money can play huge roles as well. By buying and selling the debt of governments, central banks can change the supply and demand for credit and bring interest rates up or down, so they also factor in interest rates’ importance to you and me. Thus, you must keep your interest in interest rates up so you can fix your budget and the trajectory of your life and financially focus on what is truly important.
