Understanding the Rise and Fall of Interest Rates

Interest rates are in line with the current status of the economy. When people are borrowing money from banks and other financial institutions, the interest rates tend to be higher because there is a large demand for such a product. However, as the economy sours (which will happen because the economy is cyclical) interest rates tend to decrease because the demand for loans has decreased. As such, interest rates are lowered in order to make loans more attractive to people and thus, hopefully stimulate the economy.

It is important to note that interest rate fluctuations impact both sides of the investment world. In other words, as the interest rates for loans decrease, so do the interest rates for savings accounts, certificates of deposits, and other interest bearing accounts. As such, even though you would save money on loans by way of lower interest payments, you are also losing money on your savings accounts by way of lower returns. Therefore, depending on your current financial position, lower interest rates may be a good thing, a bad thing, or a little of both.

A large piece of the population is affected by decreasing interest rates. As shown above, some experiences are positive while others are negative. However, besides taking advantage of home loans during a low interest period, there are other advantages to low interest rates. If you are a college student and have student loans, the best time to consolidate your student loan debt is when the economy is in the toilet. If the economy is in that position, the Federal Reserve will most likely cut certain interest rates in order to stimulate borrowing. As such, you can take advantage of that situation by locking in on a low interest rate for student loan debt consolidation purposes. The result of doing so is that you will save thousands of dollars in interest over the life of the repayment of such loans.

However, even though obtaining a better mortgage and consolidating student loans are advantages of low interest rates, what do you do if you already own a home and do not have student loan debt? Now is the time to start thinking about investing. When interest rates are low, this usually means that the economy is suffering. As such, many people sell all of their investments in order to get their hands on cash. This could be the time that you could take advantage of panicky investors by buying an investment at a bargain basement price. You still have to do your research and analysis, but an opportunity should be out there waiting to be snatched up.

Even though low interest rates will negatively affect your savings investments, the advantages of low interest rates are many. Remember that interest rates usually follow the current economic trend. Therefore, if the economy is at its peak of prosperity, you would want to dump a large amount of money into savings vehicles, but if the economy is at the pits of recession, you should look for investment opportunities and loan and consolidation benefits.