Interest rates play a vital role in financing expenses for cars and homes alike, while they also determine savings rates and the annual percentage yield on certificates of deposit (CDs) and savings accounts.
Reduced rates make borrowing money cheaper, encouraging consumer and business spending and helping drive asset values higher. On the other hand, rising rates often help to curb inflation.
Loans
Interest rates affect everything from how much it costs consumers and businesses to borrow money to your savings ability. When interest rates increase, borrowing becomes more costly – particularly mortgages, auto loans, credit cards and student debt – leading to higher monthly loan payments and greater total interest paid over time. Paying down debt during a time of high rates may help limit its effects.
Rising interest rates mean that savings accounts, GICs and other deposit accounts will provide higher returns in return for holding onto your money invested – this makes saving for big purchases easier! On the flipside, rising rates may cause consumer demand to decline due to increasing expenses when spending money and may lead companies to reduce investments, leading to decreased earnings and stock prices – this must be factored into an investors decision when considering investing during periods of rising rates.
Deposits
If you keep up with financial and economic news, chances are you know about interest rate changes; but what you may not realize is how these shifts impact your money.
As interest rates rise, banks become more profitable as they can make greater margins between what they pay depositors and what they earn by lending out cash at short-term rates. As such, savings account and GIC yields typically increase as interest rates do.
Higher rates can also put off borrowers, discouraging them from spending or investing their funds and slowing economic growth and stock price drops. That is why central bankers prefer moderate interest rates that encourage growth while keeping inflation under control; but finding this ideal balance requires careful consideration as there can be multiple influences that influence whether lower or higher rates would be better for your finances.
Investments
Interest rate fluctuations can have a direct effect on investment returns; however, if your time horizon is long term and your portfolio comprises both stocks and bonds (an appropriate balance), short-term rate changes shouldn’t significantly alter it.
Higher interest rates make borrowing more costly, leading individuals and businesses to reduce spending. As a result, companies’ future cash flows decrease leading to reduced earnings estimates and stock price changes.
On the other hand, higher interest rates may prove beneficial to savers who invest their savings accounts or GICs with banks. Financial institutions also can take advantage of rising rates to increase yield on lending investments; however, rising rates can increase debt costs; make sure you pay down loans as they come due. Also consider consolidating high-interest debts so as to lower total interest payments and speed repayment.
Margin Accounts
Margin accounts can be an extremely powerful investing tool that enables you to leverage purchases by borrowing money – yet these accounts carry significant risk and require special knowledge to operate safely.
If the value of your investments declines, they could become subject to a margin call and be forced to deposit additional cash or sell securities in order to cover their shortfall. Furthermore, interest charges on margin debt could eat into any potential gains you might otherwise enjoy.
Brokerage firms set margin rates, which depend on several factors including market conditions and the Federal Reserve’s actions. Margin rates typically follow rate increases or decreases from the Fed, though planners consider margin rates too high and recommend keeping margin exposure low. Some investors use margin as overdraft protection on their brokerage account – it acts similarly. Margin can have an enormously important economic effect; higher interest rates make borrowing more costly and encourage people to save instead of spend.