Interest Rates: A Key Factor for Borrowers and Investors
Interest rates are a crucial factor that concerns both borrowers and investors. On one hand, they can increase the cost of consumer financing; on the other, they can make certain investment products even more appealing.
In simple terms, interest rates represent the cost of borrowing money or the reward for saving it. These rates are calculated as a percentage of the amount lent in a bank loan or saved in a bank account, according to BBVA’s blog.
The Role of the Bank of Mexico
The Bank of Mexico (Banxico) is responsible for determining the reference interest rate. This rate is used by banks and financial entities to establish their interest rates for investment products and consumer loans. When Banxico’s interest rate rises, investment yields increase while credit costs more; when it falls, the opposite occurs.
Interest Rates in Investments
Mexico has witnessed a surge in investment products targeting small savers and those seeking returns on almost any amount of money.
Diego Paillés, co-country manager at Bravo Mexico, explains that although interest rates have decreased in recent months, our country remains an attractive place to earn returns on savings.
“We’ve moved from yields above 11 or 12% annually a few years ago to around 8% today. Although it has gone down, we can still find some products with higher rates,” Paillés detailed.
If you’re looking for an investment product, experts recommend dividing 72 by the interest rate to estimate how long it would take for that investment to double. This simple calculation helps anticipate the time needed to double your money.
Interest Rates in Loans
Evaluating interest rates for loans can be more complex, as they are generally higher than investment rates. Credit card interest rates can exceed 60%, while personal or salary loans may have interest rates above 20% annually.
These high-interest rates can lead to over-indebtedness and financial stress. According to Bravo, 65% of credit card holders only pay the minimum amount, and Mexicans typically have two to three credit products on average.
“The recommendation is to create a payment plan that outlines how and when you’ll pay off your debt, understand the products you’re contracting, and consider their impact on your finances whenever you make a budget,” Paillés advised.
Additionally, experts suggest reviewing credit conditions to determine if the debt will be subject to compound interest or have a capped rate. It’s also essential to compare similar products across different institutions to find the one with the lowest interest rate and consider other costs that make up the Total Annual Cost (TAC) of your loan.
Compound interest accrues on the initial capital and generates new interest, while simple interest always produces returns based on the original capital, according to Santander’s blog.
Key Questions and Answers
- What are interest rates? Interest rates represent the cost of borrowing money or the reward for saving it, calculated as a percentage of the amount lent or saved.
- Who determines interest rates in Mexico? The Bank of Mexico (Banxico) sets the reference interest rate, which banks and financial entities use to establish their rates for loans and investments.
- How do lower interest rates affect investments? Lower interest rates can lead to reduced returns on investment products, but Mexico still offers attractive savings opportunities with rates around 8% annually.
- What are high-interest loans? Credit card and personal or salary loans often have interest rates above 20% annually, potentially causing over-indebtedness and financial stress.
- How can I manage high-interest loans? Create a payment plan, understand the loan terms, and consider the Total Annual Cost (TAC) to make informed decisions about your finances.
