Interest Rates
2007-04-29
Many of you may have wondered what exactly your interest rate is. Is it only a torturing device that makes your initial loan more expensive that it already was? After all you were only borrowing the money because you were short of it to start with. Such flagrant opportunism could buy you an express ticked to the seventh level of the netherworld. It could be true; however the truth is less mystical in nature. Just read this article and use an interest rate calculator and the shroud of darkness will disappear.An interest is usually the price or amount someone pays for the transitory use of someone else’s funds, abut it can also be the payment that someone receives for lending those same funds. The relationship between the lender and the borrower is clearly defined. But more important might be the reason that your interest rate increases. Your interest rate depends upon many different factors, and one of the import factors it depends upon is inflation.
Inflation is best described by the purchasing power of one of your dollars. It is also related to the Consumer Price Index, an index that measures the percentage increase of basic commodities through a pegged year. The pegged year is a year in which the economy performed above expectation. When it comes to what makes a country’s commodity list, well that is entirely at the discretion of that respective country’s economic managers. There is no general world-wide consensus on commodities because we share our planet with a large number of different cultures. Some of them are heavy rice eaters, while others will prefer corn over rice any day. Maybe some are heavy wheat consumers, while others don’t fancy it that much. The basic commodity of a country may not apply to another.
In fact it’s actually very simple; when prices increase your dollar will buy you less. Prices have the tendency to steadily increase over time, and as a result your dollar today isn’t necessarily equivalent in value to your dollar tomorrow. Take the price for comic books: if you could buy four comic books with one dollar, thirty or forty years ago, now you can’t even buy one for a dollar. This is inflation at its best.
So how do all of these relate to your increasing interest rate you ask? Well investors try to preserve the value of their money through investments in high yield activities that are either equivalent or higher than the inflation rate. Taking a hypothetical interest rate pegged at 6.5%; then the money you should earn, save and invest will have to at least match this rate. Because when the end of the year comes and if your money stayed in your piggy bank, its overall value eroded by exactly that rate. So if you saved 100 dollars at the start of the year, by the end of the year it will be worth $93.5, since 6.5 percent of it will be lost due to inflation.
In developed economies like the United States and those of Western Europe, the interest rate of bank savings will usually be equal to that of the inflation rate. If there is fierce competition on the banking market then your interest rate will get higher so you’ll get more yield for your money.
A country’s interest rate is usually decided by the central bank of that nation. But the interest rate they declare doesn’t have to be followed to the letter, or better said the percentage. This interest rate is only a benchmark, so if your savings account interest rate is lower than that benchmark you will lose money.
In conclusion inflation is a pivotal factor that affects your interest rate. Whenever inflation moves up or down, the benchmark interest rate will increase or decrease concordantly. Use an interest rate calculator for the whole image.
More tool on the mortgage calculators website.
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