What is Low Interest?
Low interest means that the extra amount which the borrower has to pay on the principal is less. In the present financial world this term means an ease for the borrower because economic burden gets reduced on the borrower and he can feel financially secure at the same time when he is repaying the borrowed money to the creditor. Also, the irony is that people are considered to be really worthy if the interest rate is less because low interest rate is a sign of {{{high credit}}} worthiness.

There might be numerous reasons for low interest rate such as boom in a particular sector or economy is booming, but the fact is that if we go by the definition of interest rate, it means the cost of borrowing money and when the interest rate is high the two sectors which are most deeply affected are the banking sector and the real estate sector. So we can see the negative effects of the {{{high interest}}} rates in comparison to low interest rates .The demand for loans decreases as a result of {{{high interest rates}}} and the rate of defaults also increases because a lot of people become financially weak to repay the loans because of fluctuation in interest rates. Moreover the real estate prices also tend to get affected because of high interest rates and as a result depreciation of real estate prices happens. This routine is more common in times of economic depression.

If we also look at the negative effects of low interest rates we will see that its effect takes a long time to come into the scenario because when the economy is booming the banks encourage people to seek loans by charging low interest rates. As a result the frequency of loan applications increases. Sometimes the interest rates are so low and banks at times neglect to see the credit worthiness of the borrower and offer them loans but the negative effects come into scene when the borrowers start defaulting and the numbers tend to increase. The banks face a financial burden and eventually if this situation is not controlled the bubble bursts and as result the financial institutions register heavy losses or declare bankruptcy.

Two main reasons for Federal Reserve banks altering the interest rates are inflation and performance of the economy. If inflation is soaring high the Federal Reserve Bank will try to increase the interest rates to slowdown the economy and reduce inflation. On the other hand it lowers the interest rate when the economy is performing poorly. Buy lowering interest rates more people will buy loans and as a result individual spending will increase.

Thus low interest rate has its own positive sides when it comes to a relief to an individual but has a negative side which shows its effects if this practice of low interest rates is carried out uncontrollably leading to cases like recession and bankruptcy. On other hand {{{high interest rate}}} might be a heavy burden for borrowers but at times this step to increase the interest rate becomes mandatory to curb some economic variables which tend to grow abnormally.

Articles from September 2009
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