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Janice France-Pettit: Interest rates and personal finances

Union Bank of California

Posted: July 17, 2010 4:55 a.m.
Updated: July 17, 2010 4:55 a.m.
 

Whether you are borrowing money to finance a home purchase or deciding where to invest your savings, interest rates can be a key factor in your financial transactions.

Interest is defined as the cost of borrowing money. While this may sound simple, understanding interest rates and their impact on your finances can often mean carefully reviewing statements and other documents, including the fine print, and discussion with your financial advisor to ensure you are interpreting the details correctly.

The following information may help clarify how interest rates affect your personal finances.


Economic indicator
Interest rates can be a reflection of the economy. Usually if the economy is weak, interest rates will also be down, in hopes of sparking spending. Conversely, if the economy is strong, the investment opportunities are usually attractive enough that people will pay more to borrow the money they need to participate.


Credit

Your credit score can also affect the interest rate you receive on a consumer loan. If your credit score is below a certain level, the lender may view you as a greater risk and charge you a higher interest rate. However, if you maintain a favorable credit score, it may help you secure a lower interest rate. Collateralization (where a borrower pledges an asset as recourse to the lender in the event that the borrower defaults on the initial loan) also impacts interest rates. A home loan is collateralized by the property and generally has a lower interest rate because the lender has less risk.

In addition, unsecured credit, like a credit card, does not have any collateral and may result in higher interest rates.

If you need access to money or funds, borrowing against the equity in your house may offer a lower interest rate than other options, including credit cards or personal loans. Consult a financial advisor for detailed information.


Spending

Interest rates can also affect the way you spend. When the rates are low, it generally means that more borrowing power is being placed in the hands of the consumers. This may provide financial benefits if you are in the position to spend or invest.

For example, you may acquire a lower monthly mortgage payment by refinancing at a lower interest rate or use the low rates to afford a big purchase, such as a vehicle.


Savings
In addition to spending, interest rates can factor into how you save money as well. Check interest rates with your lender to find the highest yield for savings accounts, certificates of deposit (CDs) or money-market funds. Learn more about current interest rates online at your financial institution's web site or in person by visiting your lender. Fluctuations can happen daily so keep in touch with your banker to ensure the best rate of return.

Incorporating these concepts into your financial plan and consulting regularly with a financial advisor may help you leverage interest rates to your advantage.

Janice France-Pettit is a senior vice president and regional manager for Union Bank, overseeing the Simi Valley, San Fernando Valley and Antelope Valley regions. Her column reflects her own opinion and not necessarily that of The Signal. The foregoing article is intended to provide general information about retirement planning for businesses and is not considered financial or tax advice from Union Bank. Please consult your financial or tax advisor.

 

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