view of coins representing rising interest rate

Two Serious Effects of Rising Interest Rates

How a Rise in Interest Affects Consumers and the Market 

When someone borrows money, there’s a chance that they will not be able to pay it back. To compensate for this risk, lenders charge interest for the loaned money. The interest rate is the amount charged on top of the borrowed money for the use of assets and is usually calculated as a percentage of the principal or total loan amount. Put simply, interest is the amount lenders earn when they loan their money and is determined by the interest rate of the loan . 

All that said, there are effects that stem from interest rates when they rise or decline. These effects can also affect the psychology of both business owners and buyers alike. We have outlined how rising interest rates influence both consumers and the market. 

How Consumers React to Rising Interest Rates  

People often look to buy things like cars and houses as quickly as they can. However, the interest rate plays a role in determining whether or not they can afford to pay back the borrowed money. With a higher interest rate, people will be less eager to spend money on their wants. 

Businesses that make use of heavy equipment can also be affected by rising interest. Purchasing these types of machinery can be too expensive; thus, they’ll cut back on expenses. This can cause their productivity and output to face a decline later on. 

Conversely, a lower interest rate can encourage individuals to spend more money. This way, the same business owners who make use of advanced and heavy-duty equipment can work efficiently thanks to their high-quality supplies and machinery. In a way, the lower interest rate boosts their productivity and output. 

How Markets Will React to Rising Interest Rates  

When interest rates rise, the cost of borrowing money also goes up. Purchasing a home will not be as easy, and business financing will also be negatively impacted. Some people may also have trouble getting healthcare and other services. Since consumers are going to cut back on expenses, the economy may slow down. 

Inflation can also be affected by a rise in interest rates. Rising interest can make consumer spending and demand for products and services decline. On the other hand, if the interest rates go down, inflation can speed up. 

Stocks are no exception when interest rates rise. Interest growth usually impedes the performance of stocks. As stock prices go down because of rising interest rates, investors may find stock ownership undesirable, resulting in less demand for stocks and a company needing to cut back on its own expenses. 

Ultimately, knowing how to manage your finances when interest rates go up is essential. While this may seem simple at first, advice from a financial expert can be beneficial to your success. If you ever need help with your financial decisions, don’t hesitate to contact a professional.  

Get Help Handling Your Personal Finances 

If you need helpful financial advice, contact Tostrud & Temp, S.C. in La Crosse, WI. We provide various accounting services catered to our clients’ needs, whether personal or business. Our professional financial experts will do their best to assist you.