Understanding the Fundamentals of Interest Rates

Since the financial crisis of 2008, interest rates have somewhat stabilized to normal levels, encouraging more spending which in turn is slowly improving the world economy. Lower interest rates have also encouraged people to purchase on credit, which can be a good thing, but there are cautionary tales when it comes to interest rates like this.

First of all, low interest figures are a great way to encourage consumers to spend their money on items which would otherwise be beyond their reach. Commercial businesses also rely on low interest to take out loans for expansion. On a larger scale, governments also take out loans to provide for public works. In general, a low rate will encourage people and organizations at all levels to spend and build.

On the flip side, a low rate is bad for low- risk investors who rely on the rate to grow their money. Institutions like insurance and pension companies need a bigger figure for their assets to grow as well. In the worst cases, an extremely low figure can push spending to elevated levels, created a bubble which will eventually burst.

As with any concept in financial planning, a low interest number doesn’t necessarily mean good things for everyone involved. Investors and institutions need to keep a watchful eye on any changes in the rate for their own steady growth.