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Interest Rates 101: Understanding The Cost of Borrowing

12/24/19 Ricky Baizas
Interest rates can vary for the average person, depending on your credit worthiness, ability to pay back the loan and your overall financial situation.

 

When assessing personal finances, income and taxes tend to receive the most attention. However, interest rates are another critical factor that can have just as great an impact.*

 

Interest rates can affect the mortgage paid on houses, the amount of money one plans to invest, and even the type of car that can be purchased. Generally, when interest rates are low, people are more apt to borrow money. Clearly, it’s easier on personal finances if a consumer takes out a personal loan at a 5% interest rate rather than a 15% interest rate. It’s also better to borrow at a 3-4% fixed rate for a mortgage than it is to take out a mortgage when rates are higher.

 

 

When money is borrowed from a bank or other lender, there’s a requirement to repay it over time at a certain interest rate. In a nutshell, the interest rate functions as the cost of borrowing the money. A person’s interest rate will be higher or lower, depending on that person’s credit worthiness. From the lender’s point of view, it’s about assessing the risk involved in that person’s ability to pay back the loan.

 

It appears likely that U.S. interest rates could be headed for an increase, so it’s a great time for a better understanding of how an interest rate’s increase can affect personal finances.

Personal Borrowing

The interest rate for individuals is determined by several factors, including the person’s credit worthiness, the consumer loan market, and overall supply and demand economics. Interest rates may rise if the demand for loans outpaces the amount of money available for loans. For individuals seeking a loan, the biggest question is how costly is it to borrow money?

 

If you’re looking for personal loans or a mortgage for a new home, the given interest rate will determine the cost of repayments for the loan. Borrowing becomes more expensive with higher interest rates. If interest rates rise, as they are expected to do, that can make any lingering, large debts more costly (and difficult) to repay. For many Americans with high-interest credit card debt, this can be an exasperating issue, as the debt clock still rolls on for many Americans.

 

This can lead to a vicious cycle of people trying to pay off credit card debts, but only being able to pay off the interest without making much of a dent into the original amount borrowed.

Saving Money

On the flip side of the coin, interest rates affect Americans who save money. It’s the reverse of getting a loan. Saving money at a bank, basically gives the bank a loan with your money. In return, the bank pays you a bit on that money in the form of an interest rate. When interest rates are high, that translates into higher savings for you in your savings account. When interest rates are higher, that often benefits people with money and hurts debtors.

Investment

As seen above, high interest rates can make saving more beneficial to people with money to save. They can also impact levels of investment, and could reduce stock prices. Conversely, investment often increases when interest rates are low. As we’ve seen in recent years following the 2008 great recession, economic activity grew, as people tend to borrow more money and spend more easily when interest rates are low.

 

Interest rates have been kept low since the 2008 Financial Crisis in order to encourage consumer and business spending. Now that spending has risen, and unemployment levels are lower, it seems the right time for consumers and businesses to expect an interest rate hike for the first time in nearly a decade.

A Better Credit Score Helps

Lenders typically offer a lower interest rate for having a strong credit score. A higher credit score means that the credit bureaus deem that particular borrower as being a good risk for a loan. Good credit score applicants will definitely get a better interest rate on the same loan as compared to poor credit score applicants.

 

According to MyFico.com, an individual’s credit score is most affected by how well they make regular on-time payments. The next most important factor, which comes to about 30 percent of the score, is how much you owe on loans and credit cards.

 

Right now is a great time for individuals seeking a personal loan. If you’re looking for a quickly processed online personal loan, visit LoanMe for a fast appraisal of your loan application and credit worthiness. Loans are often approved within 24 hours. Check the LoanMe Prime Loans for current lending rates based on FICO credit scores.

 


*This article has been prepared for general information purposes only. The information presented is not legal, financial, tax or accounting advice, is not to be acted on as such, and is subject to change without notice.
 
Credit approval is subject to LoanMe’s credit standards, and actual terms (including actual loan amount) may vary by applicant. LoanMe requires certain supporting documentation with each new application. If you have any questions regarding this, call us at 844-311–2274. California loans are made pursuant to LoanMe’s California Department of Business Oversight Finance Lenders Law License #603K061. LoanMe also offers loans in certain other states which may have higher minimum loan amounts.
 
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