Home Banking Effects Of Bank Interest Rates

Effects Of Bank Interest Rates

by Arpita Wadhawan

Bank interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited or borrowed in the bank account. In simple words, it’s the calculated small percent od amount on the amount borrowed. It is the rate a bank charges to borrow its money, or the rate a bank pays its savers for keeping money in an account.

Bank Interest rates targets are a vital tool of monetary policy and are taken into account when dealing with variables like investment, inflation, and unemployment.

According to the New York Times, banks make more money on mortgage loans when rates are low.

Banks will be providing interests on the below

  1. Saving account
  2. Fixed deposits

Banks also charge interests on things like

  1. Loans – Loans can be educational/personal/housing etc. Banks have the authority to decide the interest rate for the principal amount.
  2. Schemes
  3. Credit card payments – Generally banks will be charging the late payment of credit cards adding some interest on the purchases made using the credit card.

Each bank has its own standards and terms to give the interest rate. Fixed deposits are the most benefited with the interest rates given by any bank. Senior citizens are even more privileged with fixed deposits in India. Interest rates of any bank would have great effects on its customers as interest rates rise, profitability on loans also increases. The higher the variation in an increase in prices and fall in the purchasing value of money rate, the more interest rates are likely to rise. For this reason, the lenders will demand higher interest rates as compensation for the decrease in purchasing power of the money they will be repaid in the future. The same reflects in banking sectors, the profitability increases with interest rate hikes. When interest rates are low, individuals and businesses tend to demand more loans. Each bank loan increases the money supply in a fractional reserve banking system. When consumers pay less in interest, this gives them more money to spend, which can create a ripple effect of increased spending throughout the economy.

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