We’ve all seen promotions for low interest rates on everything from cars and homes to furniture and credit cards. While we know lower is better, what exactly does a low interest rate mean for your loan? The experts at KEMBA Financial Credit Union are here to help you understand the details of low-interest rate loans and how you can use them to your advantage.
What are Interest Rates?
Whether you’re taking out a personal loan, commercial loan or mortgage loan in central Ohio, you’ll be required to pay back the borrowed sum within a specific period of time, known as the loan term. Over time, the loan principal, or amount of money borrowed, accrues interest. This percentage-based amount is added to your loan principal and depends on a number of factors, including the loan term and type. Fixed interest rates, for example, remain the same over the life of the loan, while variable rates can change based on market fluctuations. No matter your loan type, the lower the interest rate, the less additional money you must pay back to your lender.
How Do Interest Rates Fluctuate?
When taking out a long-term loan, such as a mortgage, there are two types of interest rates to consider: fixed and adjustable rates. Fixed interest rates are set at the time you take out a loan. A fixed rate will not change, no matter what happens in the credit market. Adjustable rates increase or decrease over time depending on market fluctuations. This means your payments could go up or down over time. Most commonly, adjustable-rate mortgages tend to start at a lower interest rate than fixed-rate mortgages but since the rates can change, it can be a gamble for homeowners.
How Do Market Changes Affect Interest Rates?
Interest rates are directly correlated to the supply and demand of credit. If there is a sudden increase in the need for credit, interest rates will increase as well, and vice versa. The Federal Reserve Board has the power to lower benchmark rates to encourage consumers to borrow and spend, thereby boosting the economy. Conversely, the Fed can also raise rates to stem the flow of money and slow the economy, to control inflation.
Due to the COVID-19 pandemic, many businesses had to temporarily close or change their business model to help keep Americans safe. Thousands of businesses struggled to reopen and gain their footing again. The Fed responded by keeping interest rates artificially low, in hopes of kick-starting the U.S. economy amid the pandemic. Low rates, while good news for borrowers, translated into meager returns for savers.
But lately, the Fed has begun raising rates in a bid to curb high inflation. This could mean higher rates paid not only to savers, but also for credit cards, auto and personal loans, and mortgages and home-equity loans. Conversely, your savings accounts may not accrue any high interest for quite some time.
Depending on your next big project, now could be a great time to borrow money to start making your dream a reality. Low interest rates mean less money to pay back in the long run. If you’re interested in learning more about borrowing options or what to look for in a loan, contact one of KEMBA Financial Credit Union’s experienced loan officers, or visit one of our many Columbus branch locations.