Understand interest rates, so that they become your best friends!
Being smart with money and understanding interest rates is very important in today’s world. Astuteness is required not only in calculating interest amount you have to pay. You also need to know how to save and make money leveraging them!
Not able to understand? Here you go.
Interest rate is the price of money. It could be a profit you earn from saving or investing. It is also the cost for borrowing cash. Usually interest rates on savings account/other investments is lesser compared to interest rate you pay for taking a loan. This differential is how the banks earn money.
These rates can be your worst enemy if you haven’t understood the concept correctly. Here are four points that will help you appreciate interest rates better!
Interest rate varies from bank to bank
Do remember that interest rates vary from bank to bank. The rate you would pay on your home loan from one bank might be higher or lower compared to a different bank. Make sure you do a competitive analysis among various banks to understand and choose the bank which provides the most competitive rate. This is applicable not only to bank rates but also to credit card rates. Hence make sure you always deal with authentic money advisors who can help you find the best rates.
Types of interest rates
Loan rate can be of two types: fixed and variable. The fixed interest rate is constant for the duration of the loan. But variable interest rate fluctuates based on the market forces. If you are regularly tracking financial markets and macro indicators for your country you would understand variable rates better, else we recommend you to choose a fixed rate of interest.
Higher the inflation, greater the interest rate
Inflation is the rate at which the prices of daily commodities like petrol and groceries increase on monthly/quarterly basis. The higher the inflation rate, the more the interest rates will rise. This is because the purchasing power of money gets reduced when there is increased inflation. Thus the cost of producing and procuring goods increases. Hence people and companies tend to borrow money which increases the demand for loans. This causes banks to increase their interest rates.
Be aware of concession schemes
Concession schemes for women borrowers and senior citizens are offered by many financial institutions which helps save substantial sum on the interest rate. Always enquire, invest or borrow from such schemes.
As consumers we should have complete understanding about interest rates, as it has the potential to save and make a lot of money.