The Impact of Interest Rates | zerodebt.co.za
Grasping The Impact of Interest Rates on Your Finances - blog | zerodebt.co.za

Interest rates are a fundamental part of financial management. Understanding how these work and how they affect your personal finances is essential to helping you manage your debt responsibly.

Here are three critical things to know about interest rates

This is to help you understand how they impact your personal finances, for better or worse:

  • Borrowing Costs

The interest rate is essentially the price of borrowing money. Whenever you borrow money, whether it be a credit card or a loan of some kind, interest rates will be applied as a means of determining how much the loan costs. 

The higher the interest rate, the higher the borrowing cost will be. This means that you’ll have to pay more each month on your loans, which can impact your monthly budget and undermine your ability to save. 

When borrowing, you want to aim for the lowest possible interest rates you can get. The tricky thing is that getting a low interest rate depends on having a good credit score. New borrowers or borrowers with poor credit histories are more likely to get higher interest rates simply because they pose a greater risk to the lender.

However, through good debt management, you can eventually raise your credit score and thus lower the interest rates that you are offered. Once lenders see that you are a responsible borrower, you can negotiate better terms.

  • Savings and Investments

On the other side of the coin, interest rates can benefit you if you have savings or investments. When the interest rate is high, your savings at the bank will grow more quickly. When the interest rate is low, they will grow more slowly. 

Therefore, if you are saving money or investing, try to place your money in an account or an investment that yields the highest possible interest rate so that your money can grow.

In the short term, this growth might seem negligible, but over the long term, a high interest savings account can yield significant rewards.

  • Repaying Debts

Variable interest rates can have a profound effect on your ability to pay off your debts, as they fluctuate with the market and can go up or down without warning. The upside to this is that sometimes your interest rate will decrease, which benefits you as your debt repayments become smaller. However, when interest rates go up, your payments also go up, making the loan repayments more expensive. 

You could opt for a non-variable interest rate, which remains static throughout the term of the loan and is unaffected by anything going on around it. The benefit of such an arrangement is that you won’t be met with the nasty surprise of an increased interest rate, but you also won’t benefit from drops in interest rates either.

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