Ways Interest Rates Can Affect You

What is an interest rate? An interest rate is the additional cash or money that you will pay when paying off a loan. Interest rates are constantly changing and they have the potential to affect a lot. The Federal Reserve Board, often called the “Fed,” is responsible for setting the standard for interest rates. The Federal Reserve Board regulates the interest rates in the banking system.

Low Interest Rates Effect

So what does a low interest rate mean? When interest rates are low, it makes borrowing money easier and cheaper. This is good because it allows consumers and businesses to have more money in their pockets. More money in consumers’ and businesses’ pockets means more spending. However, with consumers and businesses spending more money, it can cause an increase in demand. This in turn causes things to be more expensive. We refer to this concept as inflation. Inflation can cause a lack of purchasing power for the consumer and for businesses. Therefore, it’s good to have low interest rates, but they must be kept in check to ensure they don’t cause inflation.

High Interest Rates Effects 

With a higher interest rate, consumers and businesses do not have as much money to spend. This is because they are paying more in interest than usual. This then has a negative effect on businesses and consumers because there is not enough cash out in the economy. When businesses do not have enough cash, they cannot afford to hire new employees or even pay their current employees. Therefore, increased unemployment rates can result from high interest rates.

High Interest Rates Effects on Stocks

When interest rates rise, individuals will begin to see a higher return on their investment in the stock market. This will result in less of a demand for stocks. This will cause people to take less risks in the stock market. As a result, the stock market will ultimately suffer. 

Mortgage Interest Rates

Mortgage interest rates have a great effect on the economy as a whole. If you have higher mortgage interest rates, the price of housing is more likely to decrease. This means that if you are trying to sell your house, you might not make as much money as you could if there were to be a low interest rate. However, this may be good for the buyer. When the mortgage interest rates are lower, houses typically sell for more because consumers interest rates are not going to be as high. 

As you can see, there are both positive and negative effects to both a low interest rate and a high interest rate. It’s important to keep an eye on the current interest rates to potentially predict what’s going to happen in the future. It typically takes at least around 12 months for us to begin to feel the effects of a changed interest rate. You can find current interest rates here at Nerd Wallet.