Understanding Interest Rates

Interest rates are a hot topic right now. They affect nearly every aspect of the average consumer's life—from the house you live in, to the car you drive, to the money sitting in your savings account.

When you’re shopping around for a loan, credit card, bank account or mortgage, the first thing to consider is the interest rate. But, before you make a final decision, there are a few things you should know to make the best possible choice.

What is interest?
In simple terms, interest is the cost of borrowing money. It’s compensation to the lender for taking a risk if the borrower is unable to pay back the money. The higher the risk, the higher the interest rate.

Calculate the dollar amount in interest you’ll pay for a loan using three pieces of information: the interest rate, the amount of money being borrowed and how long you intend to take to pay off the loan. Use these online calculators from Mountain America Credit Union to help figure it out.

Why do interest rates change so often?
Interest rates vary based on what type of loan you're looking for and what the demand for loans looks like across the country. When demand is high, interest rates go up. When demand is low, lenders charge less for their money.

If you're shopping for a loan, choose a financial institution with competitive interest rates.

What role does the Federal Reserve play?
If you follow the news, you've probably heard frequent stories about the Federal Reserve raising interest rates. The Federal Reserve is the central bank of the United States.

The Fed adjusts interest rates in an effort to improve the national economy. When it wants to encourage Americans to spend more money and boost the economy, it cuts interest rates. When it wants to maintain a strong economy, it raises rates to contain inflation.

There’s no need to panic when rate changes happen. If you're in the market to borrow money, stay focused and keep your long-term financial goals in mind.

How can interest work to your benefit?
Rising interest rates are not a reason to put off striving for your goals. In fact, you can use interest to maximize your financial gain.

Savings accounts, certificate accounts and other financial accounts, for example, become more valuable each time interest rates go up. When this happens, seize the opportunity to make your money work for you by increasing regular deposits.

Furthermore, rising interest rates won't affect your existing fixed-rate mortgages or other loans. Simply pay the agreed upon rate as you would normally. Your rate is locked in. If a rising interest rate has affected your credit card payments, consider looking for a more competitive rate and transferring your balance.