Understanding Interest Rates: How They Affect Your Savings and Loans

Understanding Interest Rates: How They Affect Your Savings and Loans

[Link]

Interest rates play a crucial but complicated role in our lives, influencing everything from how much we earn on savings to the cost of borrowing money from the bank. Be strategic about your future by understanding the financial impacts of interest rates and changes in the financial landscape.

If you're not sure where to start with understanding interest rates, Landmark National Bank is here to help! Our interest rate guide will provide information on managing interest rates whether you're looking to put money away or open up some new funds.

How Do Interest Rates Work?

Generally speaking, interest rates represent the cost of borrowing money and/or the reward for saving it. When you deposit money in a savings account, the bank pays you interest. Conversely, when you take out a loan, you pay interest to the bank. The value of that interest is your designated rate, which is expressed as a percentage of the principal amount.

Let's say you take out a $1,000 loan for five years with a 3 percent interest rate. By the end of those five years, you will have paid the bank back $1,150, or the original loan amount plus interest. You can calculate this amount by multiplying the original loan amount-the principal-the interest rate, and length of your loan. For this example, that looks like: 1,000 x 0.03 x 5.

How Are Interest Rates Determined?

Interest rates are decided by several factors, including bank policies, economic conditions, inflation, and market demand. Central banks, such as the U.S. Federal Reserve, set benchmark rates that influence the rates banks charge each other for short-term loans. These benchmark rates trickle down to consumers like you in the form of interest rates on savings accounts, loans, and mortgages.

Interest rates are always changing. Central banks might raise interest rates to curb inflationor lower them during downturns to encourage borrowing and spending. Inflation and market demand for credit also affect interest rates. Inflation decreases the purchasing power of the dollar-whenever inflation grows, interest rates grow with it.

Fixed Versus Variable Interest Rates

Understanding the difference between fixed and variable interest rates is key when determining your financial options and planning for the future. Here's everything to know about fixed interest rates versus variable interest rates:

Fixed Interest Rates

Fixed interest rates remain consistent throughout the life of the loan or savings account. They don't depend on the rise and fall of financial markets, which makes them more predictable and easier on your set budget. You'll often see fixed-rate interests for auto loans, student loans, fixed-rate mortgages, and other personal loans.

Variable Interest Rates

True to its name, a variable interest rate varies based on changes in market interest rates. If the market interest rates drop, for example, your loan repayments decrease with the falling interest rates. That may be enticing, but keep in mind that your interest rates and loan payments would also rise with higher market interest rates.

Some variable interest rates can start lower than fixed rates, but they carry the risk of increasing over time. Variable rates are often used for adjustable-rate mortgagesand some credit cards.

How Interest Rates Affect Savings

Saving and interest rates are tied closely together. Higher interest rates on savings accounts, certificates of deposit (CDs), and other interest-bearing accounts mean higher returns. When account interest rates are low, savers earn less. Before you commit to a certain financial institution or one of its interest-bearing accounts, do some comparison shopping to maximize your savings account interest rates.

Impact of Interest Rates on Loans

Borrowing and interest rates go hand-in-hand. Here's some information on how interest rates affect loans in ways both big and small:

• Personal loans.Higher interest rates increase the cost of personal loans, leading to higher monthly payments and total repayment amounts. Conversely, lower rates make borrowing cheaper.
• Mortgages.Mortgage interest rates significantly affect the overall cost of buying a home. A higher rate can mean thousands of dollars more in interest over the life of the home loan. Fixed-rate mortgages provide stability, while adjustable-rate mortgages (ARMs) offer lower initial rates with the risk of future increases.
• Credit cards.Often called annual percentage rates (APRs), credit card interest rates can vary widely. Higher rates mean more costly borrowing if you carry a balance from month to month. Understand your credit card's APR and how interest is calculated to avoid racking up excessive debt.

Explore Savings Accounts With Landmark National Bank

As time goes on, you need to equip yourself with quality financial information. Discover Landmark National Bank's options including checking accounts, savings accounts, and more. When you choose us, you're choosing knowledgeable team members who you'll leave feeling as friends. Contact Landmark National Bank todayor find a bank branch location near youto get started!

Public link

Please use the above public link if you want to share this noodl on another website.