What is Interest, And How Does it Affect Your Borrowing?
Interest is defined as ‘A fee charged by a lender to a borrower, for the use of borrowed money, usually expressed as an annual percentage of the principal amount.’
Interest is determined by a Repo rate that’s set by the Reserve Bank of South Africa – this rate is the interest rate at which the Reserve Bank lends other banks money. When there is an increase or a decrease in interest rates, it is the result of the Reserve Bank adjusting this Repo rate. Banks and other financial institutions generally add to this rate when lending money to you – to make a profit. Basically – interest is a charge levied on the transaction of borrowing money.
How is interest created?
Most interest comes from people who make large purchases, such as buying homes cars, or paying for education. Generally they take out a loan, such as a home loan or student loan to do this. Interest is also generated on short term financing, or on smaller purchases – such as loans, or purchase on HP from retailers, or on credit cards.
The rate of interest that an individual has to pay is determined by personal financial circumstances, such as the size of the loan and the repayment period. The interest rate is affected by the economy and consumer spending.
There are a range of companies offering competitive fixed interest personal loans.
Some interesting interest rate facts:
Interest rates increase when the economy fluctuates. And because the economy is largely affected by consumer spending, the more people spend, the more demand there is for goods and products. This means that retailers and manufacturers can charge more for those goods and products – which means inflation goes up.
The reason why interest rates go up is to curb this inflation. The result of this increase is that consumers are forced to start spending more responsibly. You see, when there’s an interest rate increase, incomes remain the same, but monthly payments on things like vehicle financing, home loans and credit cards go up.
Consumers are then forced to cut their spending on other items to accommodate these increases, which in turn puts retailers and manufacturers under pressure to drop their prices. This is when inflation goes down.
An additional benefit of higher interest rates is that it encourages consumers not to spend as much and rather to save, as they receive a better rate of interest on their savings.
A great way for consumers to protect themselves from increases in interest rates is to take out financing that offers fixed rates. This will help you keep better control of your finances, because you’ll know exactly where your money is going for a set amount of time.
This article was provided by Charlie Stewart of SEO specialist 2Stroke Interactive on behalf of personal loan specialist DirectAxis.
