Interest rates can be confusing, but they are important to know because they affect both the cost of borrowing and the return on savings and investments. This article will help you understand how rates work, what factors influence them and how to protect your assets against short-term volatility caused by changes in interest rates.
The interest rate you pay on a loan is determined by many factors, including the lender’s assessment of your creditworthiness (which is why it’s important to keep your credit report clean). A variety of fees may also be rolled into your loan, such as administrative and legal charges. The amount you pay in interest, however, is always a percentage of what you originally borrowed.
In general, higher interest rates can make it more expensive to borrow money and discourage consumer spending. This can cool the economy and help control inflation, which is often one of the goals of central banks.
Low interest rates can encourage consumers and businesses to borrow money for things like mortgages, automobiles, student loans and home improvement projects. They can also cause companies to expand their operations by buying new equipment or updating existing plants.
In addition, lower interest rates can boost stock prices because they can reduce the cost of financing for companies through debt. They can also improve the income of savers, retirees and people who receive fixed income from investments such as bank savings accounts, GICs and bond coupons.