Assignment 1: Discussion—Interest Rates
Instructions:-
Based on the articles and your independent research, respond to the following:
How is consumer debt different today than in the past?
What role do interest rates play in mounting consumer debt?
What are the typical interest rates applied to credit cards, mortgages, and other debt?
Many of today’s interest rates are variable rather than fixed. What difference does this make to pension plans, housing loans, and other personal finances?
Write your response in 1–2 paragraphs (a total of 200-300 words).
Solution
Assignment 1: Discussion—Interest Rates
Based on the articles and your independent
research, respond to the following:
How is consumer debt different today than in
the past?
Liberalization of the banking industry and competition leading to reduced consumer borrowing rates has led to an increase in consumer debt. Besides reductions in interest rates and the entrenchment of the banking industry even to the prior-unbanked population, consumers have proportionately increased their spending relative to the past. Today, unlike in the past when most of the borrowing went to capital investment, we are now witnessing more auto loans, credit card facilities, home loans and college fee loans. This borrowing is now in the trillions of dollars, meaning that most of our lives are now on credit.
What role do interest rates play in mounting
consumer debt?
Interest rates are used by the federal banks to control the amount of consumer debt, and by extension, the amount of money in circulation. Using monetary policies, if the federal government wants to reduce the amount of money in the economy circulation, it only needs to raise interest rates and therefore people will save more than borrow, which reduces consumer debt. The reverse is true.
What are the typical interest rates applied to
credit cards, mortgages, and other debt?
Often, interest rates on credit cards, mortgages and other loans depend on the lender, the credit profile of the borrower and the federal bank indicative rates (FinAid,(2017). In 2017, the average rates are as follows
Credit cards: 15.61% for variable and 13.02% for fixed credit cards
Mortgages: 30 year fixed interest rates 3.88% and 15 year interest rates at 3.17%
Loans to students: 6.8%
Many of today’s interest rates are variable
rather than fixed. What difference does this make to pension plans, housing
loans, and other personal finances?
Variable interest rates means that the lender, in the case of housing loans and other personal loans, is able to vary their interest rates depending on the prevailing economic situation while in fixed interest rate regime, the interest rates remains constant. The borrower cannot therefore predict their obligations with certainty. With regard to pension plans, pension managers are able to vary the interest rates on pensions depending on the prevailing economic situation.
References
FinAid,(2017), Student Loans, Retrieved from http://www.finaid.org/loans/studentloan.phtml
Ponder,C.,(2014), National credit card rates, Retrieved from http://www.bankrate.com/finance/credit-cards/rate-roundup.aspx .
SunSentinel,(n.d.), Average 30-year mortgage interest rates, Retrieved from http://articles.sun- sentinel.com/2012-01-19/business/sfl-freddie-mac-interest-rates-20120118_1_interest-rates-