Interest Rates - The Good, The Bad and The Ugly

Interest rates are basically the amount of money you pay or are paid for the use of money. These rates can work for or against you depending on whether you’re borrowing or lending.

Anytime you deposit money into an interest-bearing account, you are allowing your financial institution to use your money. They use it to make loans and pay you interest for the privilege. You can still withdraw your money at any time because banks are constantly lending and collecting money.

When a bank loans money to someone they charge interest. They pay you slightly less interest than what they collect from the borrower. This is how they make money. That’s why you will usually earn more interest on certificates of deposit than on savings accounts because they know you’ll leave your money there for a certain amount of time.

Interest Rates

Putting your money in an interest-bearing account is a great way to grow wealth. You don’t really have to do anything but pick a good account with a credible financial institution. Then sit back and watch it grow. Most banks and credit unions are insured so you know your money will be there even if the financial institution fails.

When you borrow money however, you are the one paying interest. The rates vary depending on the type of loan, length of the loan, whether you have collateral and most importantly your credit. Usually shorter loans with collateral have the lowest rates since the risk for the bank is lower. That’s why, if your credit is bad, you’ll pay very high interest if you get the loan at all.

In the United States, interest rates are determined by the Federal Reserve. Financial institutions use this as a guide when lending money. These rates change according to the economy. When things are good, rates are raised to prevent inflation. Inflation happens when too much money is circulating. Higher rates discourage spending and encourage saving and investing.

When the economy is not so good, the Fed will lower rates. This encourages spending and discourages saving and investing. You will pay back much less money over the life of a loan if you borrow when the rates are low. Conversely, you will make much less money on investments during this time.

When rates are low and you want to borrow money, try to secure a fixed-rate loan. With this type of loan the rates are locked in and cannot go up when the economy gets better. You will save a tremendous amount of money by doing this.

If you are interested in borrowing money when rates are high, you may be better off with a variable rate loan, especially if you have the opportunity to re-finance later. This way you’re not locked into the high rate for the entire loan. This is somewhat of a gamble though because there is no guarantee the interest rates won’t go even higher.

Unfortunately asking your banker if it's a good time for you to get a loan is not always your best bet. They make money anytime they make a loan regardless of the rates. However, if you need a loan, it's a good idea to check around with several different banks because some are more willing to lower their rates than others.

The best approach is to time large purchases with drops in rates. You can check these rates anytime at interest.com. They have current interest rates for mortgage, auto loans, credit cards, CDs/Savings and more along with lots of great calculator tools as well.

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