How Interest Rates Affect Consumers, Investors and Businesses

Interest rates, consumers, investors, and governments

First Published: ADawnJournal.com April 14, 2010

The interest rate of a country is extremely important to the economy. The changing of the interest rate can have a great number of effects on how the economy performs, as well as on the people who benefit or are hurt by the economy.

Consumers

When the Federal government cuts the prime interest rate, it affects consumers as follows:

·   If the government cuts the interest rate, it can lower the cost of getting a mortgage for a consumer. This depends on whether or not the consumer has a fixed or variable interest rate mortgage though. If someone has a variable interest rate, their mortgage payments will go down as the interest rate goes down.

·   The lowering of an interest rate will also help credit card owners. If the rate goes up on a variable interest rate, the credit card owner pays more, while the opposite is true if the interest rate goes down.

·   While cutting an interest rate saves money on mortgages, it hurts a consumer’s savings. Less interest means less money in the bank. When the interest rate goes up, consumers get more out of their savings.

Investors

The changing interest rate will affect investors and make them change their investing habits. Some examples of this with a rising interest rate include:

·   When the interest rate goes up, credit card companies, financial companies, consumer staples and service companies that do not use a lot of debt will be good companies to invest in.

·   Conversely, when the interest rate is up, mortgage lenders, real estate developers and automakers are companies to avoid for investments.

Companies that benefit from high interest rates will typically suffer when the interest rate is slow. Conversely, companies that suffer when interest rates are high will benefit when the interest rate is low.

Businesses

Businesses around the country are significantly affected by changing interest rates. When the interest rate changes, it has an effect on how much, or how little, a company borrows. When there is a shortfall in payroll, or there is a need to buy equipment, a company will often take a short-term loan. If interest rates are high, it will cost the company more to pay back that loan, which can affect the profitability of that business. When interest rates are low, companies can borrow more and not be as hard pressed to pay back the interest.

Business strategy is also affected by interest rates. Since businesses are all about profit, knowing what the interest rate will be on loans is very important. If a company is implementing a new program that will bring in a profit of five percent per year, but interest rates are seven percent per year, then the company should put their money into the bank rather than investing it.

Interest rates are very important for consumers, investors and businesses. When they go up, some areas benefit while others suffer. When the interest rate goes down, other areas benefit while those that benefit on high interest rates suffer.