How Does Interest Rates Affect Our Purchasing Decisions?


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Rosie Normanton Profile
Rosie Normanton answered
Interest rates have the potential to change frequently, therefore when people take out loans they do not necessarily know how much they will have to pay back. Rates of interest affect what we purchase as we have to pay back more than the minimum price of what something costs. When interest rates go up people have to pay back more, but when interest rates go down people have to pay back less. Over time, people may be able to pay back the original cost of something they buy, but the added amount of the loan repayments adds an extra cost, which they may or may not be able to afford.

Rates of interest have a great impact on the things that we purchase. In some cases rates of interest can shift, which adds an extra dynamic to the decisions we make about what to buy. Interest is the amount of money that is added to the loan that someone has borrowed. If someone borrowed £120 from the bank and had an interest rate of 5% a month for a year they would have to pay back £12 a month from the original amount, plus an extra £6 a month from the interest. This is a simplified example of how interest works. Rates of interest are the percentage that is owed on the original amount borrowed.

In the case of mortgages, for example, there are different types, which affect how much someone would have to pay back. A variable mortgage fluctuates depending on the rate of interest, which can go up and down. A monthly payment on a mortgage may start at 0.5% but could then increase to a higher percentage or decrease to a lower percentage resulting in a change to the amount the person would have to pay back each month. A fixed rate of interest means that the amount someone has to pay back each month would stay the same throughout the period they are paying back their mortgage. This could be advantageous when interest rates are higher than their fixed rate, but not as good when interest rates are lower.
rana nAveed Profile
rana nAveed answered
If the interest rates are higher than insted of spending money for purchasing new things people go for saving to get interest on their money.
In short you can say with increase in interest rates the purchasing power of people decreases.

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