In the financial world, the interest rate plays a huge role in any financial transaction. Interest rate is the proportion of money a borrower pays for an asset or any form of debt. It is the return or interest paid to the financial service provider.
In Nigeria, interest rates are by financial institutions and the Monetary Policy Committee (MPC) assigned by the federal government to keep interest rates at a moderate and stable price level for proper economic growth.
When it comes to interest rates, either increasing rates or declining rates, the economy gets influenced in many ways. Rates of interest ascertain economic performance. Lower interest rates are a sign of a slow or poor economy as interest rates are changed to enable cash flow.
Higher interest rates are, in turn, viewed as an indicator of a healthy economy with favorable cash flow. Interest rates can slow down or improve an economy. It is necessary to examine the various aspects of our financial life influenced in different rate scenarios to understand how interest rates impact our wallets;
Some ways interest rate can impact your finance are:
Many factors influence how an individual saves, but a decline in interest rates tends to discourage saving because the reward is affected. A higher interest rate makes it attractive to save money as it enhances increased return. Thus, a change in interest rates influences an individual saving, which is an essential part of financial planning.
How you will be affected by a change in interest rate depends on if you are inclined to borrowing or investing. Because the interest placed on loans will be less, lower interest rates offer more opportunities to borrow or acquire cheaper loans, which means it favours the borrowers. People are discouraged from getting loans to invest in their businesses because a higher interest rate translates to a higher borrowing cost.
Lower interest rates allow companies to acquire less costly loans that impact the price of the goods they sell. As far as expenses are concerned, people will have more funds to spend on goods and services.
Interest rates can have an impact on the income people earn by affecting economic growth. Slow economic growth will influence the level of income earned. With substantially less income, people will have less cash to survive on.
When setting financial goals and making meaningful decisions regarding one’s finances, understanding the impact interest rates have on one’s life can help.