What are interest rates?
Interest rates have reached their highest point in the past 20 years marking a dangerous turn in the U.S. economy affecting thousands of Americans in the process of taking out loans. Anytime someone wants to take out a loan from a bank they create a plan to pay installments of money to the bank throughout a certain period. These installments usually have a minimum amount to make sure that the debt will eventually be paid. But for the lender to make money off of these loans they will add interest rates that increase the amount of money that the borrower will have to pay back so that they end up paying more money than they were given. Interest rates can vary depending on what bank you use, your credibility with the bank, or how much the loan is for. Although interest rates may seem small and insignificant they can have large effects on the amount of money someone ends up paying after paying back their debt, especially if the borrower only pays the minimum installments. For example, a loan of $10,000 with minimum installments of $200 and interest rates of 5%, the amount of money paid in total with interest when only paying the minimum installments is $11,237.
How and why does the federal reserve change the interest rates
Although it may seem that banks are in total control over how much they want the interest rates to be on their loans, the federal reserve has a strong influence on how much banks want to set their interest rates to. The federal reserve is not able to directly control the interest rates of a bank, instead they are able to control things such as adjusting the interest on reserve balance rates which can increase or decrease the interest rates. By adjusting mechanisms like interest rates when loaning to banks, the federal reserve can control how much money a bank has which determines what the banks set their interest rates to. It may seem that having a low interest rate is always beneficial since it promotes spending in the economy due to an increase in loans, the federal reserve will often take action to promote an increase in the interest rates in order to slow down spending in the economy as well as lower inflation rates which is beneficial for the long term.
Why is the federal reserve increasing the interest rates now?
As mentioned previously, the federal reserve will increase interest rates to do things such as lower spending and inflation. Earlier in the millennia, interest rates had been slowly going down and healing from their spike in the 1980s caused by intense overspending, spontaneous increases in oil prices, and a rise in wages. Since then, the economy's interest rates have slowly declined to a more natural state. However, in the last few years, we have seen a dramatic growth in consumer spending and demand while supply has drastically dropped due to COVID-19. But lately, since things have returned to a more normal way of life and people have returned to work, the federal reserve has been taking strides to improve the economy and interest rates to get it all back to how it was in the past. The best way that the federal reserve could help the economy is by slowing down its growth in demand.
How does the interest rate affect you?
If you are planning to take out a large loan such as a student loan for education or a mortgage to purchase a house, the interest rate could affect how much money you end up spending to pay back your debt. Because of the high-interest rate, using a credit card can be more expensive, so it's commonly advised to use a debit card or cash instead. You should also not take out any large loans unless you are positive you can afford to spend a lot paying back the interest because instead, you could try to wait out until the inflation goes back down.
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