How Interest Rates Affect My Savings and Loans A Simple Guide

 

Ever wonder why the money in your savings account may be getting interest, but the money you borrowed from your bank is going up in cost? The answer is related to interest rates.

For example, imagine I have ₦200,000 in a savings account.

Annual interest rate	Interest earned in one year
2%	₦4,000
5%	₦10,000
8%	₦16,000

Interest rates are important in several aspects of our financial lives, such as saving for the future and financing education, business, or personal costs. It is important to understand how they work so that we can make better financial decisions and avoid unnecessary costs.

In this straightforward explanation, I will explain what interests are, the impact interests have on my saving and lending, and what we can do to manage our money more effectively.

• What is an interest rate?

An interest rate is what percentage you'll pay when you take out a loan or collect when you put money in some savings accounts or investments.

Normally, whenever we take out a loan from a bank or other lender, we have to pay interest on the loan as well as pay back the amount of the loan. In an interest-bearing account, the bank may pay interest as specified in the terms of the account when we save money in the account.

For instance, if I credit ₦100,000 into an account with an annual interest rate of 5%, then in one year I might receive a credit of ₦5,000, in the absence of fees, taxes, or compound interest, and assuming that I had the full balance from the start.

But if I take a loan of N100,000 with a 5% per annum simple interest, then I will pay an interest of N5,000 at the end of one year, apart from repaying the N100,000.

The actual savings and loan calculations may vary due to compounding, fees, fluctuating interest rates, repayment terms, and other factors.

The first is how interest rates impact my savings. The first one is how interest rates affect my savings.

Interest rates can affect the rate of growth of our savings.

If a bank pays a higher rate of interest on a savings account, we might receive more interest from the money we leave in our account. If it is lower, so may our interest income be.

The following examples are based on simple interest, no fees or taxes, and a constant balance.

A comparison of figures illustrates the need for savings product comparisons. But it's not just about the interest rates. There are also restrictions on withdrawals, account fees, minimum balances, and security of the institution to consider.

How Interest Rates Affect My Loans

Interest rates also dictate the cost of borrowing money.

When we get a business loan, personal loan, or any other type of credit, the interest rate that we have to pay will impact the overall amount we will be liable for.

For instance, if I take a loan of N500,000 at 10% per annum simple interest for one year, the interest to be paid is N50,000. I would repay a total of ₦550,000, apart from other fees if any.

Under the same circumstances, if the rate was 20% lower, the interest would have been ₦100,000, and the total repayment would have been ₦600,000.

In the case of real loans, interest is usually calculated on the loan amount that remains, and the loan is repaid according to a schedule. As a result, the expense may vary from these simplified scenarios.

All the above should be checked before taking a loan, including the annual percentage rate (APR) if it is provided, the length of time over which the loan will be repaid, the monthly payments required, the penalties that must be paid and any other fees.

• When interest rates rise, what will happen in the economy?

Higher interest rates may mean that it will cost more to borrow more money, especially if you are getting a new loan or have a loan with a variable interest rate.

A company that relies on a loan to buy equipment, for instance, may get sticker prices on its financing. This can decrease the funds available for other expenses.

A higher interest rate could also lead to increased savings due to some savings products being more appealing.

But it varies according to the financial product. The contract interest rate of existing fixed-rate loans typically will not adjust to higher market rates, and variable-rate loans can be more costly.

• When rates decline, what will happen?

Some borrowers may be able to take out loans that are more affordable when interest rates are lower. It might be easier for businesses to expand and for people to have cheaper loans to expand their businesses.

The downside of the lower interest rates, however, is that some savings accounts may earn lower interest rates.

This can make it necessary to compare a variety of financial products to make sure they fit our objectives the best.

Don't assume that a lower borrowing rate means that a loan is affordable and that a higher savings rate means that it is the best account.

How inflation impacts my savings

Interest rates are just a piece of the savings puzzle. Another key consideration is inflation.

Inflation is a rise in the overall level of prices for goods and services in an economy over a period of time. If prices increase, the purchasing power of the same amount of money will be lower than before.

Suppose my savings earn 5% interest in one year while prices rise by 10%. While my balance on my account grows, my purchasing power might not grow.

That's why I should think about the real return on savings, which accounts for inflation.

When I have a positive account balance, it is not necessarily a good thing for the purchasing power of my savings.

Managing savings and loans is very simple.

There are some practical steps that can be followed to make more informed financial decisions.

Make a comparison of savings accounts: interest rates, various account fees, minimum account balances, and withdrawal requirements.

Take only what we need: A lower amount of a loan may also result in lower interest costs, depending on the interest rate and term of the loan.

Carefully read the loan agreement: Know if the loan rate is fixed or variable and how interest is determined.

Pay bills on time: If you pay bills late, there may be extra fees, and the late payments may be reported to our credit history.

Emergency savings: The idea of saving money for the unexpected costs may help to decrease the need to borrow in an emergency.

Regularly review our finances: as interest rates, income, and expenses change, our financial plans may be affected.

Final Thoughts

Interest rates are a big factor in saving, borrowing, and managing our finances. The higher rates can lead to higher interest earned on some savings products, yet they can also lead to higher borrowing costs. Reduced rates could make some loans more affordable but mean less return on savings.

My suggestion is to be aware of what is happening with each and every financial product that happens to be offered before depositing our cash. When evaluating choices, exercising good debt management, taking into account inflation.

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