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Keep In Mind the Pros & Cons of Low Interest Rates and Analyse Thoroughly Before Applying For It

October 11, 2016

You might have come across the news about lower interest rates on TV or internet. However, do you know what it really means for the common people? Generally, the interest rates are determined by the supply and demand of credit. An increase in the demand for credit will raise the interest rates while decrease in credit demand will decrease them. However, it is contradictory in terms of supply.

With the increase in supply of credit, the interest rate will be reduced while decrease in credit supply will increase the interest rate. Furthermore, supply of the credit is increased by an increase for money provided to the borrowers. Despite this fact, there are certain pros and cons of lower interest rates that you need to consider. In case you are running a small business, you can easily borrow the money to buy equipment, hire employees, make acquisitions and pay the dividends. Low interest rates encourage the first homebuyers to buy a home and refinance their mortgage at cheaper rates. Apart from these advantages, you must also take care of the demerits associated with low rate.

Low rates serve as a hidden tax for those who have saved and expected to receive a reasonable return on the investment. It has a real negative impact on the banks and insurance companies. Insurance companies usually invest their assets with a hope of higher rate on their capital.

Thus, to take full advantage of low interest rates and to avoid the demerits associated with them, you need to consider the following:

  • If the interest rate will be passed on to the customers – Some banks do not prefer to pass the rate cuts to the customers. In such situation, there will be no effect of low interest rates on them.

  • If banks are willing to lend –Even at lower interest rates, some banks are reluctant to lend and they may reduce the availability of home loans.

  • Look for deflation –In times of deflation, people usually prefer to save even if the interest rates are low as the effective real estate interest rate will be still high.

Thus, before going for the lower interest rates, you must evaluate that whether further cuts in interest rates will be possible or not. If you consider the rate very early, you might miss the benefits that you can avail if it will decrease further.

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