Interest rates Simplified

Financial experts always say to always check on the interest rates when we borrow money whether on a loan or the usage of credit cards. The rule of thumb for interest rate is that the lower it is the better it is for the borrower. To put it simply, interest rates is the money being charged by the lending company for the use of their money. Usually, it is expressed in an annual percentage of the money borrowed or what is called as the principal.
Interest rates are computed by dividing the total amount of interest against the amount of the money borrowed. To make it clearer, let’s say that you borrowed some money from the bank where the bank charges you $90 as interest for a year on a $1000 loan. You will be able to compute the interest rate by dividing $90 over $1000 which will result to 0.09. To make that into percent value you have to multiply it to 100% which will result to 9%. So in this example, the interest rate for the $1000 that you had borrowed from the bank is 9%.
There are several reasons on why many would chose to borrow money and pay interest but the bottom line is all the same, it is because they need the money to spend now and can’t afford to wait for a couple of years to save that amount of money. The most common example is when a person decides to buy a house but still does not have the capacity to pay the house in full payment. They can still be homeowners now by taking on a mortgage or applying a loan and using the money from the loan to pay the house in full instead of waiting a couple of years to save up and buy the house. It is also common for businesses to borrow money with interest for additional capital.
There are several factors in determining interest rates. One factor on why interest rates will increase is because there is an increase in the demands of credit. Similarly, interest rates will decrease if there is a decrease in the demand for credit. So basically it all boils down to supply and demand.
Here is a clear example on how it works, when a person decides not to pay their credit card bill for this month and pushes it to the next month or even on a later date, that person is affected by paying higher interest and also increases the interest rates as dictated by the economy. This is because by not paying, the amount of credit or money available in the market is decreased. So it’s safe to say that the more people who opt not to pay their credit card bills on time endanger the increase of interest rates of the economy.
Interest rates are also affected by inflation. When inflation rate is high, it is most likely that the interest rates will also be high. This happens when the lending company will ask for higher interest rates to make sure that they are properly compensated even if there is a decrease in their money’s purchasing power when it is repaid in the future. Purchasing power is the ability to buy more from the amount of money. For example a candy that costs $1 now can cost $5 in the future which means that the money’s purchasing power is decreased because the same candy cannot be bought with the same amount.
The government can also affect the decrease or increase of interest rates. Which part of the government does this job? In the US it is the Federal Reserve or popularly known as the Fed. They decide on the connection between monetary policy and the interest rates.
In order for a person to get more out of their loans, it is important for them to understand interest rates. Borrowing money is not as simple as getting the money and paying it in the future. What makes it complicated is the interest rate and it helps to know and understand the nature of interest rates.