2022 was a rough year for people wanting to take out new loans for housing and transportation. From the point of the pandemic, when people were being offered 0% interest to the Federal hikes, some significant differences have appeared.
Even though things do not look great for people needing loans, the resoning behind the interest rate increases is good. It is required to help slow the demand, which in turn will help the economy level off and improve in the long run.
Let’s look deeper into how this can happen and why it should.
Slowing The Economy
The only way to get control over the economy’s growth is to decrease the inflation rates. The best way to do this is for the Federal Reserve to step up and vote for an increase in interest rates. This may not seem like a great thing for those of you wanting to apply for a home or car loan because you will be paying more on your monthly payment than you would have a year or two ago.
The thing with this concept is simple, though. Increasing the interest rates will slow the number of people applying for loans, which will slow the market’s demand down. Slowing this down will also slow the overall economy over time. This is imperative to a country if they want to have a stable economy.
The second part of this movement that is important to understand is that the interest rates on bonds and banking accounts will also go up. This means that people will strive to save more money to invest in these areas that will help them build wealth. This will also help slow the economy because more people will be saving rather than everyone trying to spend.
Interest Rates And Investors
Now, you must understand how the different interest rates affect the investors to understand why an increase in rates, such as at the offers found at the iSelect home loan rates platform, is a good thing. You may have been wondering why the stock market has been so volatile as of late, and for a good reason. You would think that the investors would be snatching up all the stocks they can with low-interest rates.
That is the case for the most part, so when the interest rates begin to rise, the stock market investors will sell off and stop buying them, moving their money to bonds and savings accounts because they will have a more significant yield on their return.
To make this concept a little easier to understand, all you need to think about is that if interest rates go up, the stock market goes down. It is that simple. This affects the economy in the same way as described above. The fewer people invest in stocks, the slower the growth of companies will be, which will help level the economy to a more manageable state.
The Bottom Line
There is so much to the economy that you would need to take a college-level course to get a complete grasp of how it works, why it works, and what needs to be done to keep it within a range that works for all citizens in every country around the world. We do not have the time to give you such knowledge, but the bottom line is that the country’s inflation must decrease for the economy to improve.
Inflation rates can cripple a country because it creates an environment that can push the economy to the brink of disaster. Think about it this way; if the people in your area with good credit can borrow money easily, without paying any interest, they will snatch up everything in sight (let’s say housing for the sake of argument.)
So they purchase ten houses, leaving ten other people unable to buy them. In turn, those people without homes either become homeless or have to opt for renting a place. Since the demand for rentals increases, the costs that the homeowner’s charge will increase.
Until the demand levels down, the rent cost for those homes will continue to grow. Increases to the limits they have now, causing a country with an ever-increasing number of homeless. We are talking about families becoming homeless, not just single people.
The bottom line is that interest rates must go up to reduce the number of investors buying homes. This will allow others with good, but not great, credit the ability to get a home or car loan so they can get into their own places rather than being put out onto the street because the cost of rent is not feasible with the wage that most people of the country can earn. In turn, this will help decrease the inflation rates and slow the economy down just enough to level things back out so the government can get its inflation under control.