Let’s take a closer look at this phenomena and how and why it affects millions of people worldwide. An interest is accumulated when you borrow money from a bank, a lending institution or a building society. The amount you borrow is called “the principal”. But because you are using somebody else’s money to grow your assets, you will incur “interest” on the lending amount.
The rule of 72, often used in periodic compounding calculations, can also indicate of when our principal amount gets doubled by interest rates. Let’s say that (k) is the number of years it takes for your principal loan amount to double. Then take (m) to be the interest rate per annum. K * m = 72. Therefore if the annual interest rate is 3% it will take 24 years for your principal loan amount to double.
Interest Rates are calculated daily, but every first Wednesday of the month the board of the Federal Reserve Bank of Australia (RBA) is deciding on whether we are due for a rise. Sometimes they will also lower the interest rates.
These decisions are influenced by our markets and the economy. Huge events like a stock market crash can significantly influence interest rates. However the main economic factor which decides on our interest rates is the inflation. The definition of inflation means the rise in the cost of our goods and services. The RBA is generally aiming at an inflation target of between 2% and 3 %. In recent months we have touched the 3% barrier and therefore the interest rates have increased. Another key influence on the inflation is our labour market. This means the cost of wages and the employment situation in the market place.
When you borrow money, you are entering a contract with your borrowing institution. You can then elect the length of your loan and whether you desire to pay back the interest only or principal and interest. This will greatly influence the length of your loan and the amount of money you have for play. The longer you are paying interest only, the more your loan will grow. Over a 30-year period this will most likely double your initial loan amount. At present the interest rates are at 7.37% p.a.
The type of loan you choose, when borrowing, greatly influences the amount of interest you will have to pay back during the course of the loan. Some loans allow you to pay any extra monies into your loan without penalties. This in turn will lower the term of your loan and therefore the interest rates paid in total.
If you don’t want to be caught short when choosing a loan, make sure you look closely at the product you are considering. It pays to shop around, as different loans affect the amount of interest rates you are set to pay. If you are not sure about it, don’t be afraid to consult a financial adviser. They can point you in the right direction depending on your financial position. Interest rates will continue to influence many people’s lives and can make the difference of whether you are able to keep up your repayments or not.