What Are Interest Rates? What Happens to Your Money When They Rise
An interest rate is the fee for borrowing or lending money. The interest you earn when you leave money at a bank is a rate, and so is the interest you pay when you borrow.
The base rate you often hear about in the news is the benchmark rate a country's central bank sets. When that benchmark moves, deposit and loan rates follow, and that reaches everyday life.
Why the base rate moves
A central bank adjusts the base rate as it watches the economy. When prices rise too fast, it raises rates to slow the flow of money; when the economy sags, it lowers rates to loosen money and add energy.
So the direction of rates carries a view of the economy. Raising rates generally reads as a signal to cool an overheating economy, lowering them as a signal to revive a weak one.
What rising rates do to your money
| When rates rise | When rates fall | |
|---|---|---|
| Deposit interest | Increases | Decreases |
| Loan interest | Increases | Decreases |
| Debt burden | Heavier | Lighter |
As the table shows, rising rates are welcome for money you have parked but a burden for money you have borrowed. So when rates are climbing, keep an especially close eye on loans whose interest is rising.
Interest rates are a big lever that sways deposits and loans, and even home prices and investor mood. Their exact path is hard to call, but simply knowing whether rates are in a rising or a falling phase lets you gauge the effect on your money in advance.