The term interest rate refers to the cost incurred while borrowing money. Alternatively, it can be referred to as the compensation for a service as well as a risk of lending money. If you go to a bank and take a loan, you will be charged interest. Similarly, if you decide to save money with the bank, you will earn interest. It is what motivates people to either save money or borrow money.
The central bank determines the interest rates in a country. A country’s central bank manipulates these interest rates by adjusting the rates of lending money to or borrowing money from the retail banks. Of the central bank wants to increase the money supply, it will decrease its rates to the local banks which will in turn the same benefit to the borrows by reducing their rates. The reduced rates are usually meant to attract more borrows.
The interest rates in different financial institutions, both for saving and borrowing, differ. The difference is however not so huge because there is control of the interest rates from a central point. There are times when you will get better interest rates while some other times it will be poorer. The question that will most definitely haunt your mind is; how can one find the best interest rates? That is what we are going to explain to you in this article.
Take a sharp look at the credit supply and demand
The interest rates will always change depending on the demand and supply of credit. An increase in demand for credit will cause the interest rates to rise; conversely, a decrease in credit requirements reduces the interest rates. It is thus common knowledge that if you want to get credit at the lowest interest possible, you wait for a time when the demand for credit has gone weak.
The credit supply usually increases if the money available to the borrowers has increased. When you walk to your bank and open an account with them, what you are doing is that you are lending them money. The bank will utilize your money in its business activities depending on the kind of account that you have opened. A savings account earns a higher interest than a current account. In the current account, you can access the money at any time. Some level of restrictions will be placed on the savings account so as to motivate you to save. When you lend money to the bank, what they will do is that they will give out your money to other customers. The higher the ability of the bank to lend is; the more credit is available to the economy. From the rule stated above, if the supply of credit increases, the interest of borrowing money will decrease. At such a time, it will be advisable to borrow money as you will get it at the best interest rate possible.
Be disciplined while paying your credit card bills
Credit card providers usually provide their customers with credit cards with which they can use to make purchases. You can utilize your credit card in purchasing goods even if you do not presently have the money with you. They give you a period within which you pay back, mostly a month.
If you do not pay your month’s credit card bill, you will increase the amount of interest that you will pay. To avoid this, make sure that you pay the bill on time. It will go a long way in ensuring you get the best interest on your credit card bill.
Consider the inflation rates in the country
Inflation has a particular way of affecting the interest rates levels. If the inflation rates are high, the interest rates will also be high. The lenders depict this behavior since they demand more interest in an aim to compensate for the future decrease in the purchasing power of the money given out. So, if you are the borrower, you will end up paying more interest rates.
It is advisable to refrain from borrowing money at a time when the inflation has escalated. To get the best interest rates, wait till the inflation has gone down. At such a time, the lenders will give you money at average rates since there is no expectation that the money’s purchasing power will decrease in the future.
Provide Collateral while Obtaining a Loan
When you decide to ask for a loan from a financial institution, at times you will be charged interest considering factors such as the credit risk, tax and time.
Credit risk refers to the possibility of you being able to repay the loan. If there is a chance that repayment of the loan will not happen, the interest rate will be high. For a secured loan, i.e. there is a high chance of it being repaid; the interest rate will be high. You can use some collateral to secure your loan. What this means is that at the time of obtaining the loan, present an item that the lender can take if you are unable to pay your loan. This could be a car or a house or something of equal value.
By you accounting for the risk factor by using the collateral, the rate of interest will likely to be lower.
Reduce your repayment period as much as you can
Long term loans tend to attract higher interest rates than the short-term ones. The deviation is because the loans that are repaid over a longer period are exposed to more risk factors such as inflation. Also, the time frame allowed makes it even easy for defaulting to occur.
To get the best interest rate, make your loan a short-term if you can.
In conclusion, it is important for you to understand the variations in interest rates. It is a central factor in determining how much you will earn if you lend out money or how much one will pay if he/she borrows money. The primary factors to look at are demand and supply of credit, inflation and money policies.