Interest Rates and Their Importance
The interest rate is one of the most important factors to consider when someone is investing in a time deposit or taking out a loan because the interest rates will determine if the investment will get profits and the real price of borrowing money in either case.
What is Interest Rate?
The interest rate is either the amount of money that is charged to a borrower for taking a loan or using an asset or the amount of money a financial institution will pay to the investor for keeping his money for a period (e.g. saving account with interest or certificated deposit). In any case, the interest is clearly stated, and it has to be fully disclosed before a loan or credit can be given. The interest rate is expressed as a percentage, and it is calculated from the principal. The interest rate on loan is referred as APR or annual percentage rate since most regulatory agencies require that banks, big creditors, and financial institutions have to calculate it yearly. However, different lenders can calculate the interest rate monthly (Monthly rate) or even daily (calling it daily periodic rate DPR) for the loans they offer. Additionally, banks and lender offer several types of loans or credits plans with diverse APRs. On the other hand, when the investor deposits his money in a financial institution or opens a certificate deposit, it has to state the interest rate called the annual percentage yield APY, which is the amount of money it will pay for keeping his saving until maturity. This interest rate can be calculated or daily, monthly or for the maturity period when it will be paid.
What is the Interest rate importance?
·Loan’s interest rate determines the final or total cost of borrowing money. If someone takes a 100 USD loan to be paid in a year term with a 20% APR, he has to pay 120 USD at term or 12 USD monthly depending on the payment plan.
·The interest rate for saving account and certificate deposits determines the returns or profits the investor gets for letting the bank keep his money. If someone makes a 1000 USD deposit with a returns interest rate of 2% yearly, he will get 1002 at the end of the year or a 2 USD return. If the Interest rate use is compounding, the principal will increase each daily or monthly.
·The interest rate affects consumer spending directly. The higher the interest rate on a credit card or a loan is the higher the cost for using it, and the less likely a borrower will use it. Therefore, the consumer avoids buying on credit.
·If consumers decrease buying on credit, the stores’ inventory piles up, the production decreases and the unemployment increases. It messes up the entire financial system and the countries’ economic.
·The long-term interest rate is considered the best indicator of the national economic health or the country financial situation.
·The current financial system is built upon credit
The interest rate is the single most important factor to activate, recover, or destroy the economy. It has a direct impact on inflation and the companies’ production, the employment and the lifestyle of the society in which it is applied. It is the reason why government’s central policies are based primarily on the different credits interest rate as a promoter of economic growth and social well-being. Finally, any changes in the interest rate have an immediately impact on the countries’ economic.