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Interest rates play a significant role in determining whether you should save money or borrow money. Ideally, financial experts do not suggest that you borrow money regardless of interest rates. On no account is borrowing recommended. It is always suggested that you should have enough money to be able to be on top of your expenses.
There are moments when you would certainly borrow money, for instance, if you want to take out a mortgage or an auto loan, but it is advisable that you arrange a larger deposit, so that you do not have to borrow a lot of money.
Interest rates determine how much you would be paying on your loan and receiving on your savings. They are directly linked to the base rate by the Bank of England. Interest rates proportionately rise with the base rate. It means when the Bank of England raises the base rate, interest rates also go up and vice versa.
In other words, when the base rate goes up, you will be paying higher interest on loans and mortgages, but at the same time, you will be receiving higher returns on savings.
Impact of interest rates on businesses selling expensive goods such as cars
When interest rates go up, loans become exorbitant. The most common reason for raising interest rates is to curb inflation. When interest rates are high, people tend to be less active in the purchase and sale of properties. They would rather divert their focus to savings. They start figuring out ways to retain cash on hand.
Changes in interest rates do not affect everyone to the same extent. Undoubtedly, businesses and individuals that borrow money will certainly suffer from increasing interest rates. The blow is greater because consumer spending will be less. So, any way you slice it, businesses suffer loss and only loss.
Businesses that sell luxury goods such as cars are most likely to be affected by rising interest rates. With increased interest rates, consumers are left with less money to spend, and they generally rely on loans from lenders, which means they will end up paying a lot more than the actual cost of the car. Therefore, people either completely sacrifice their purchase or prefer to purchase second-hand cars.
Impact of interest rates on mortgages
A small percentage can make a significant difference in the total cost of a mortgage. When you take out a mortgage, you are initially put on a fixed interest-rate deal. This delay lasts for up to two, three, or five years. Mostly, lenders do not allow for this deal for more than two years.
As soon as the fixed-interest rate deal expires, you are put on a standard variable rate. The difference between the two types of rates is that the latter is subject to a change in the base rate, while the former is not.
When the base rate set by the Bank of England goes up, your standard variable rate will also go up. It means now you will have to pay a larger instalment because of the hiked interest every month, as long as the base rate does not drop. But the impact of increased standard variable rates is not limited to this.
If your budget does not allow for this and you decide to refinance your mortgage, you will have to choose a smaller size of instalments. It means the mortgage payment period will be extended. As a result, more interest will be accrued on the outstanding balance. You will end up paying a lot more money in total.
Some people are forced to choose smaller houses, and yet they cost them as much as bigger houses, thanks to increased interest rates.
Impact of interest rates on small loans and credit cards
If you are looking to apply for a new credit card, you may not be able to get the best deal. This is because high interest rates will be proposed to you. Likewise, if you already own a credit card and make a purchase after the base rate has been revised, you will be paying higher interest than before.
Do not forget that your lender will also check your creditworthiness. If your credit score is already bad, you cannot escape high interest rates. If you are looking to build your credit score using personal loans for bad credit on guaranteed approval, you will end up paying a lot more interest, and there are two reasons for this:
- The base rate by the Bank of England has increased.
- Your creditworthiness has been called into question.
Do not assume that small emergency loans will be affordable. Even if you borrow £100, you will have to pay high interest rates because of higher base rates. These small loans could become even more challenging to handle when you take out CCJ loans with no guarantor from a direct lender.
Impact of interest rates on savings
Interest rates that you receive on your savings are a reward that banks deliver for keeping your money with them, especially for not touching it for a long time. If you purchase a fixed deposit, you will get even higher interest.
There is no doubt that when the Bank of England increases the base rate, banks are compelled to pay you high interest on your savings. You will most likely get better deals if you open a new savings account.
While you are entitled to receive high interest rates on savings when the base rate goes up, it will be pettifogging. Banks usually offer a very nominal interest rate, less than 0.1% per month.
The final word
Interest rates affect both savings and borrowing. When interest rates increase, you will receive more interest on your savings in order to persuade you to spend less and pay more interest on your borrowing in order to dissuade you from borrowing money.
Likewise, when interest rates fall, less interest on savings is offered, and you will pay less interest on borrowing too. This will encourage you to spend more money in the form of borrowing, too.
