Interest As Backbone of Modern Economy - Part 6
Posted: Saturday, November 14, 2009
by Shafi Farooq
http://mywebsiteworkout.com/personal-finances/
In modern world, especially the Western world and Japan, interest rate is considered the backbone of modern finances and that includes your family finances as well. It affects and impacts us all in every walk of life. Individuals and families ought to understand its importance.
The interest comes into play when we borrow money or lend money. Everyone is affected when the interest rate goes up or when it comes down. This backbone of the economy is controlled by the central bank of a country. In the U.S., it is called Federal Reserve Bank, commonly know as the Fed.
This is the last post in the interest series. Like I said in a previous article, the interest can be considered the backbone of the Western modern economy. It is like fire. It can do wonders for you if you are careful with it. As long as you are in control, it will obey you and you can lead a good financial life.
However, if you let interest run your life and you let it have control over you and your family, then it can break you and it can break you pretty well.
When you borrow money to buy a house, for example, mortgage experts tell us the first 10 years or so, you pay more than 90% of monthly payment in interest and the rest 10% or in some cases, even less, goes into your home equity. The interest goes straight to the lending company.
If it was just principal and no interest, then you would pay your mortgage a lot faster. The same is true for credit card loan, student loan and even the loans that you can definitely live without. They all carry interest and in case of credit cards a heavy and very heavy interest rate to the tune of more than 20%.
Debt is not something very bad. Handled carefully, it can do wonders for your family and your business. It is one important component in the big picture of the national economy. It is good for expansion of factories, creating more jobs and handled sensibly, it can be the livelihood of a vibrant economy.
As one of my article shows "A few key rates can give clues about your own interest rates" - If you borrow from a friend or relative, your good standing with them is enough and you pay the money with no interest. However, you borrow from a lending institution, there is always an interest attached with the loan.
The interest rates you actually pay depend on a variety of factors.
- The more risk lenders take on, the higher the interest rates they will charge. That's why borrowers with spotty credit histories pay higher interest rates than those with good credit.
- Another key factor is the quality of the asset you are financing. A house tends to rise in value over time. If you default on your loan, the lender can foreclose and usually recover most or all of its money. That's why mortgage rates are among the lowest available to consumers whereas credit card loan carries the highest interest rate. However, on the same token, a car tends to lose value as it ages and, over time, can become worth less than the value of the loan. That means a higher risk of loss for the lender, which is often reflected in a higher interest rate.
- When interest rates are rising, you may be better-off with a fixed-rate loan. That way, your interest costs are locked in as the cost of borrowing increases, meaning interest rate.
- Interest payments on adjustable-rate loans rise and fall along with the general level of interest rates.
- Most auto loans are fixed. Credit card debt typically carries an adjustable-rate, while a mortgage can be fixed or adjustable.
Rising rates are good for savers, not so good for investors.
- Rising interest rates can boost the interest you earn on a money market deposit account or a passbook savings account.
- However, rising interest rates are generally bad news for stocks and bonds.
- Higher rates represent increased interest costs for many companies. The reason is that usually higher rates are a response to inflation which should be under reasonable control. This higher rate is a signal to the corporations that they are encountering other cost increases as well.
- Bond prices generally move in the opposite direction of interest rates. It is easy to see why bonds react so badly to rising interest rates. When bond matures, the institutions have to pay more to the lender - the consumers. But generally, rising interest rates will have less impact on bonds with shorter maturity and higher interest rates.
This Article has been viewed 210 times. (Not updated in real-time.)
No comments yet.We want your comments! If you can read this, you don't have javascript enabled, so you can't use this comment system. Please enable javascript.