Interest rates?

Question

Can somebody please explain to me what this whole interest rate thing is? I don’t understand why it keeps going up and down. What makes it need to go up and WHY?

Answer 1

Here's a simplified version:

Interest rates are the instruments that the Federal Reserve uses to control the broad money supply (loans etc) in the economy. The Fed controls the money supply in general circulation by either raising or lowering interest rates. It raises rates to prevent inflation (a situation where prices have gotten too high) or lowers rates to encourage more borrowing and spending which gives the economy a boost.

High interest rates makes consumers and businesses reluctant to borrow money to finance new major purchases because the cost of borrowing is more expensive, thus less money is in circulation. Low interest rates encourages consumer and business borrowings and puts more money in general circulation - until prices get too high again then the Fed "tightens" or raises rates again to reduce broad spending and prices come down.

Answer 2

An interest rate is the cost of borrowing money. Or, on the other side of the coin, it is the compensation for the service and risk of lending money. Without it, people would not be willing to lend or even save their cash, both of which require a deferment of the opportunity to give up spending in the present. But prevailing interest rates are always changing and different types of loans will offer various interest rates. If you are a lender, a borrower or both, it's important you understand the reasons for these changes and differences
Interest Rates are based on the economy.. for example.. Alberta Interest rates are going up because our dollar is so strong, the price of goods is down and because our dollar is so strong it makes it hard to compete in the markets.
Interests rates are based on Inflation.