3 Reasons Interest Rates Change

Here’s Why Interest Rates Are Constantly Changing

Interest rates can be a source of confusion when tackling your personal finances. If you’ve ever shopped around for a home or auto loan, one thing you might have already learned about interest rates: they change quite often!

Simply put, interest rates are the cost of borrowing money, and typically depend on your credit amongst other factors. Interest rates make a big difference in choosing if and when to make important financial commitments, so what causes them to change? There are many factors at play, but three key reasons stand out.

Read on for an overview of why interest rates change, and how the current economic environment may present an opportunity to take advantage of low rates at Xceed.

1. “The Fed”

The Federal Reserve, commonly known as “The Fed,” is the central bank of the United States. It exists to maximize employment and stabilize prices, and uses interest rates to stimulate or slow our economy.

It does this via the federal fund interest rate—the rate financial institutions charge each other when they borrow money. A change in the federal fund consequently informs consumer interest rates.

When the economy slows down (due to a pandemic, for instance), the Fed can lower the federal fund rate, causing rates on short- and long-term loans to fall. Lowering these interest rates helps encourage consumer borrowing and spending, which boosts the economy.

In March 2020, we saw this in action as the Federal Reserve cut federal fund interest rates to essentially zero in an effort to address the economic disruption caused by COVID-19.

2. Inflation

Interest rates can also change because of inflation. Inflation is an increase in the costs of goods and services. When inflation is high, you pay more for the same things you bought before—meaning your money now has less purchasing power.

In times when inflation is rising, interest rates also go up. This is because the money you’ll repay in the future will have less purchasing power.

3. Supply and Demand

Supply and demand have a direct influence on interest rates. When more people are looking to borrow money to spend on things like cars and homes, the increase in demand is met with higher interest rates. That way, lenders can guarantee they have the funds they need to meet the demand.

On the other hand, in economic climates like the one we find ourselves in now, interest rates drop to stimulate demand and economic growth.

With a better understanding of why interest rates change, now is a good time to consider how they affect you. Interest rates are at new lows due to the financial impacts of COVID-19. For many, this means it’s more important than ever to re-evaluate your financial decisions.

Thinking of buying a car? Apply now for a great, low rate on your auto loan.

Undecided about whether now is a good time to buy a new home? Now might be a good time to consider the low-interest rates Xceed offers on home loans.

Whatever option you’re exploring, Xceed is here to help.