Low Interest Rates are Both Good and Bad

Interest rates are at an all time low.

We read in the news every day that interest rates are at an all time low. So what does that mean for the typical college student, or anyone for that matter? Interest rates are determined in large part, just like most other things in our economy, by supply and demand. In this case we are talking about the demand for borrowing. When the demand for borrowing goes up, so do interest rates. When the demand for borrowing is low, such as it has been throughout the economic downturn, so are interest rates.

In the U.S. the Federal Reserve can influence interest rates by using a combination of tools can directly Impact rates but, especially as we have seen over the past several years, even when rates are low, the average person may still not have an appetite for borrowing. Why? Simple, really. High unemployment and job uncertainty. More stringent qualification requirements from banks. The list goes on.

But there is another side to interest rates that also impacts us. In addition to the interest we pay, low interest rates also impact the interest we receive on our savings deposits in banks. So just like the interest rate we would pay on a home mortgage, bank interest rates on deposits are also at an all time low. For folks looking to have their savings grow, that’s not very good news! Current bank interest rates on savings accounts are well below 1%. So if you’re getting .2% (that’s point two) on your savings, a $1,000 deposit will earn you a whopping $2 a year. Correct me if I’m wrong, but you bank charges you more than that just to use an ATM!

That’s why savers and investors are looking for other ways to have their money work for them. And that will be the topic of next week’s post!

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