When the government raises interest rates to curb inflation, it typically influences a range of borrowing rates. Here’s how it impacts different types of loans:
- Credit Card Borrowing Rate: Credit cards usually have variable interest rates that are often linked to the prime rate, which is directly influenced by the central bank’s rates. Therefore, when the government raises interest rates, credit card borrowing rates are likely to increase. This means that carrying a balance on your credit card could become more expensive due to higher interest charges.
- Car Lease Payments: The effect on car lease payments depends on the structure of the lease agreement. If your car lease has a variable interest rate, then your payments might increase in response to a rise in government interest rates. For leases with fixed interest rates, there won’t be an immediate impact, but new or renewed leases might come with higher rates.
- Mortgage Payments: Mortgages are significantly affected by changes in government interest rates. If you have a fixed-rate mortgage, your payments will remain unchanged until the mortgage is up for renewal. However, for variable-rate or adjustable-rate mortgages, an increase in government rates will likely lead to higher interest rates on your mortgage, which means higher monthly payments.
In essence, raising the borrowing rate is a tool used by governments to reduce inflation by making borrowing more expensive. This reduces consumer spending and investment, which in turn can help to slow down inflation. However, it also means higher costs for those with variable-rate debts like some credit cards, car leases, and mortgages.
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This page was last updated on November 23, 2023.
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