There are myths about interest rates that need to be demystified.
Higher rates lead to higher inflation – while the interest rate is the cost of money, it doesn’t mean that it has a direct impact on every facet of an economy. When the prime lending rate goes up, the cost of borrowing goes up, making it more expensive. This doesn’t necessarily have an effect on fuel prices or soaring food prices. Inflation is more likely to be controlled by the Reserve Bank in order to keep it from spiralling out of control.
Higher rates favour banks- The reality is that when there is a rise, this leads to a climb in bad debts, which leads to the loss of money for banking institutions. They also encourage investments and savings.
The Reserve bank governor decides everything –The decision to raise rates isn’t only left to an individual. The Monetary Policy Committee has to reach consensus and it must also be defended to Parliament.
Low interest rates entice people to take more debt on – One of the most common myths about interest rates- it remains just that. Interest rates don’t always stay low, so it wouldn’t be smart to do this. When they eventually rise again it may lead to people getting too close to their credit card limits.
Advertised interest rates are available for all people- Before applying for credit, it’s important to compare options. Rates that are promoted are typically available to a select few borrowers.
Doing your research about all that has to do with these rates will put you in a better decision in terms of financial decisions. You are always free to ask for advice from financial experts if you are ever unsure of it all.
