In simple terms, the interest rate is the payment that you pay for borrowing money. It is meant to make up for the lender for agreeing to use the money now and for the risks bounded with granting money to the borrower.
What influences the Interest Rate?
The Federal Reserve Bank and Central Bank are the two authorities that are responsible for setting up the interest rates. They decide to increase or decrease the interest rates in the market. It all depends upon the level of inflation or state of the economy.
What Happens When Interest Rate Increases?
• The higher the interest rate means higher mortgage repayments.
• It leads to the decline in discretionary income, which the amount, that left, after all, the bills have been paid.
• Having less cash to spend leads to reduced spending.
• If you have surplus money, an increase in the rate of interest encourages investment in savings instruments as banks and other savings institutions provide a higher return for your money.
What Happens When Interest Rate Decreases?
• Lower the interest rates, means lower the repayments that you make for your mortgage
• The savings that you make from cheaper finance repayment due to lower interest rate means extra money available for spending.
• Having extra money at your disposal, and access to low-cost funds put you on a purchasing and investing mode.
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