How Inflation Affects Interest Rates and Your Finances
By Daily Dosh | January 22, 2008
Inflation is what makes your money of today worth less tomorrow. Borrowers find borrowing money more attractive but it’s less attractive for lenders. This is why lenders raise their interest rates because they know that the dollars people pay next month are worth less than the money they loan today.
This turns into a vicious cycle. When prices rise, people and businesses tend to borrow more so that they can afford all the things the want to buy, whether it be cars, holidays or home improvements. This is turn causes interest rates to rise even more due to increased demand in borrowing money.
Inflation is primarily caused by governments. It may be because of borrowing themselves, printing more currency, deficit spending or giving out more credit. There isn’t much that you can do as an individual to change this.
However if you are wanting to borrow money, there is plenty you can do when trying to understand what is happening. Governments can’t keep increasing inflation as it would get to the point where there would be large demands for something to be done. When something does have to be done, this normally involves closing down the spigot or just slowing down the actions detailed above.
These actions affect how you borrow money, just like inflation. Deflation lowers rates which makes borrowing more attractive. However this causes the dollars to be worth less than they are tomorrow. Basically this means that your money is worth more tomorrow if you save and invest, than they are today.
If you are looking to borrow it’s a case of making a calculated guess as to whether inflation or deflation is going to occur. It sounds rather complicated but there are ways for the laymen to understand.
There’s no exact method set in stone but there are indicators to look out for and anyone can do this. In times gone by people used to look at the gold and silver markets, however the dollar isn’t linked to hard commodities anymore.
Because oil is such an important commodity which is linked to the production of so many products, increased oil prices means that inflation is more likely. If you notice that oil prices are set to increase or decrease in the future, you’ll have an idea of inflation.
Bond option prices are also a good signal. Professional money managers bet on whether interest rates will change considerably over the next year or two. This can be a slightly more tricky relationship to understand so it would be a good idea to ask a specialist.
Remember, the dollar today measures the costs of services and goods you buy today. But when you borrow money, those dollars are being spent today but paid back in the future. The value of the dollar when you pay back your loan reflects the true cost.
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What is the Correct Amount of Debt for You?
By Daily Dosh | January 11, 2008
Each and every one of has is in a different financial situation so there is no definable “correct” amount of debt. Luckily there are a few guidelines for those who may be unsure.
Lenders are Taking a Risk - Lending companies will lend you as much as they think you can afford. Yes, they are taking a risk in doing this, however these are calculated risks. They will look at your current and past finances such as how often you have defaulted on a loan, current interest rates along with your credit history. If you want to take out a loan you need to understand what the banks want from you.
Can You Really Afford the Repayments? Don’t rush into taking out a loan and make sure that you can really afford to make the repayments. If you know that you can’t afford the repayments don’t take out the loan! It’s not worth the hassle even although you may think so now.
If you are expecting an increase in income then you can certainly factor this into your decision. However make absolutely sure before signing any contracts.
Look at Interest Rate Trends - Don’t worry, this is not as difficult as it may seem as general trends are not that random. Bonds, futures and other indicators can also help. If you see 6% bond option prices going down then it may be that interest rates will rise. This is what professionals look at when working out future interest rates.
Check Credit History – Try and look at yourself the way a bank would. Do you honestly think that they would lend you any money? The bank doesn’t care why you were late in paying – they just care that you were late. They see everything in black and white.
Income v Expenses - Write down all you income and expenses in order to work out what is realistic. You might long for that Hawaiian cruise but can you afford to pay out every month for the next year? It’s important you are completely honest with yourself.
Think for Yourself - Bank staff are not there to tell you whether you need that item you’ve had your eye on. Think about if you would rather wait whilst you save for the money rather than paying high interest rates.
Impulse is one of the biggest culprits of debt. Before rushing out and buying what ever it is you want, think to yourself “do I really need this debt?”
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Home Equity Loans: Pros and Cons
By Daily Dosh | December 7, 2007
For many people looking for a loan, obtaining a home equity loan is the option to go for. However there are few things you should be aware of before committing yourself to any decision.
Before explaining the pros and cons, let’s look at what a home equity loan actually is. Basically it is a way to obtain credit by using your home as security. If for instance your home is worth $150,000 but you old have a mortgage of $50,000, it means you have $100,000 worth of equity which you can borrow against.
A number of homeowners will take out a HELOC (Home Equity Line of Credit), so that they can use the money for the purpose of financing home improvements. However because of tax implications amongst other reasons, the HELOC evolved to be used for other reasons.
When you pay interest on most types of debt it is not tax deductible. However it is if the interest is paid on a home load. Therefore, interest paid on a HELOC can actually be a form of less expensive debt.
Lets say you have a 12% HELOC for up to $10,000. With the majority of HELOCs you don’t actually borrow the entire amount at once. You take it out in stages, much like using a credit card of check – you just use it as required.
The benefits of this type of loan are numerous. You can simply borrow the amount you need, so keeping interest repayments down. Plus you get to reduce your taxes by a percentage of the interest paid per year.
If you had a credit card that charged 12% APR, the advantage is clear. You pay a net lower amount of money to the lender as a result of using a HELOC as apposed to a credit card to finance your spending.
As many advantages this sort of loan may have, remember just that; it is still debt. The problem is that many people find it difficult to refrain from a spending spree. As a result, a home equity loan may actually make your more fundamental problem worse, rather than better.
If you are truly dedicated to controlling your debt and want to find ways in which to reduce expenses, a home equity loan can be a good idea.
What you need to do is calculate how much you will be spending each month until for the life of the debt. Look out for debt calculators to help you.
If you are having debt problems you will need to decide if you want to spend more money over the life of the debt instead of having a smaller monthly payment, but higher total amount of interest. The better calculators will help you run through both scenarios, changing amounts to help you weigh the pros and cons.
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