Interest rates shape the financial landscape and should always play an important role in your decision-making when it comes to lending, credit, savings and investing. It’s important to understand how they work so you can make better decisions about the type of debt or investments you take on and when the right time is to borrow or save.
Lenders set their interest rates based on several factors, including the perceived risk of a person or business’s ability to repay. For example, mortgage loans are secured by the borrower’s property, reducing the lender’s risk and allowing for lower interest rates than unsecured loans like credit cards. The duration of the loan and whether it’s fixed- or variable-rate also impacts the amount of interest paid.
Inflation also plays a significant role in influencing interest rates. High inflation can lead to higher interest rates in order to curb spending, while low inflation typically results in lower rates in order to stimulate borrowing and economic growth.
As interest rates rise, it’s essential to remember that the increased cost of borrowed money will impact all sectors and industries differently. Certain sectors will benefit from the increase, such as banks and mortgage companies, while other segments may see their profits decline — especially consumer staples and basic commodities, which sell at higher prices and have a direct relationship to inflation. This is why it’s vital to have a diverse portfolio and diversify your investments with both fixed- and variable-rate assets.
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