Why Interest Rates Affect Everyone ?
Politics and social changes can be considered trivial by most us, but the economic situation affects everyone. The different economic policies will influence the exchange rate, the country’s cash flow, the unemployment rate and it determines how easy the bank users can get a loan or a personal credit. Why interest rates affect everyone ? Is because it is one of the most important economic indexes with one of the strongest correlation with the individual or ordinary citizen personal finances. Perhaps the unaware person still thinks why interest rates affect everyone, but this article illustrates it.
Why Interest Rates Affect Everyone Who Wants To Buy a New Home
The interest rate anyone can get for a home mortgage is determined firstly from the national interest rate, and then for the person credit history or financial risk assessment. It is an apparent reason, why interest rates affect everyone. Your monthly payment for your mortgage is composed of two portion one called the interest that you pay for the money you borrow and the second called the principal, which is the amount you ask to buy your home. E.g., you ask for a 100000 USD mortgage for your new home, and the national interest rate is the 5% APR, which means that you have to pay 5000 USD extra per each year you have the credit. Let’s imagine the credit is for 20 years now you have to pay 100000 from the amount of money you ask for and another 100000 just for the credit interest rate. Consequently, now yow own 200000 USD. The former scenario gives a straight forward point on why interest rates affect everyone.
Why Interest Rates Affect Everyone Who Uses Credit Cards?
When you used a credit card, and you don’t pay it in full for the month. The credit card issuer charges you a financial interest or interest for the balance you keep on the credit card. The minimum interest rate for credit cards and in some countries the maximum is established by the central bank interest rate. As a result, the people capacity for using the credit card and get credit for their needs depends on the interest rates, as well as, the final cost of or how much someone has to pay the credit card balance. Let’s imagine that you have a 2000 USD credit card balance and it carried a 15% APR, consequently, you will have to pay 25 USD just for interest or 300 USD per year. It is another clear example from the daily life of why interest rates affect everyone and how the interest rate influences our life style.
Interest Rates and Exchange rate
The interest rate of the country has a strong direct correlation with the currency exchange rate. When the interest rate is low investor take away their cash reserve to others countries, which will offer better dividends or a higher interest rate for their saving. When the investors start to move away from their cash reserve, the national currency gets weak, and its value decreases. On the contrary, when the interest rates for saving account are higher, many overseas investors bring in the money to the country to get the extra dividend. It produces that the national currency becomes stronger gaining value. The forex market is led by the open market rule of offer and demand. A bigger offer of the national currency will produce a price decrease or more significant demand for the national currency will produce its price increase. Therefore, if you want to import any good, or take a foreign destiny vacation, the exchange rate will be the responsible for how much you can afford. Maybe you are no clear yet why interest rates affect everyone, but the interest rate variation influence the national exchange rate. When the exchange rate varies all the services, and essential goods’ prices may vary as well
Why Interest Rates Affect Unemployment Rate
Why interest rates affect everyone can be illustrated with the influence it has over the level of unemployment. Lower interest rate help to reactivate the industrial sector, which can get business loans to increase its productions, moreover, the retailer and other companies will increase their inventory taking advantages of the favorable interest rates and the lower price-offering discount by volume. The new production increases will need more employees; the stores bigger stock will need more workers, the transportation, and delivery of goods will need more employees. With more money in the worker pockets, they will buy more from a retailer, which will stimulate a further increase in industrial productions, the services industry will also be beneficiated from this economy revitalization because the now employed people will need lunch, transportation, lodge, personal care, educational service, etc.. At this point seen easier to understand why interest rates affect everyone. The complexity of the national economic and its intricate network can be observed with the interest rate variation. When the interest rate increases the new jobs opens decreases, and the stores reduce their inventory because they sell less. On the other hand, when the interest rate is lower, or the central bank reduces it. People immediately increase their expenses, and more jobs are created to cover the new demand of goods and services.
Why Interest Rates Affect Money Supply and Cash Flow
The interest rate has a direct effect on people and business spending, each time the interest rates increasing the consumption decreases. The personal and business economy is based on credit. The amount of cash flow or the ability to get money in an easier way to cover someone expenses is secondary to the capacity to get loans and to the willingness of the people to spend it on new products or services. Why interest rates affect, everyone is rather simple to understand with the next scenario. When the interest rate is lower, most people are willing to extend their money buying new goods and services, of their salary is not enough to cover them, they will ask for a money loan or use any credit to cover them. This circulating money will produce that the retailers compete among them and increase their stocks, which increase production from factories. As a consequence, most people will have access to better goods and better services. Additionally, the money supply will make easier for the regular person to get a low interest personal loan, car loan, or mortgages. It is another reason why interest rates affect everyone. On the other hand, when the interest rate increases the economic slowdown and a recession can start, making harder to get a loan or even to pay for basic goods.
In a nutshell, why Interest Rates Affect Everyone because the economic situation dictates the goods prices and the ability of the people to buy them, Finally, the interest rates can accelerate and expand the country economy.