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Markets take a breather.

Investors for now appear to feel comfortable that the credit crisis and housing market will not affect the economy.  The S&P500 gained just 1 point, the Dow gained 74 points and the NASDAQ was up by 25 points for the week ending September 28th, 2007.  

Experts also believe that the US economy will remain weaker than the rest of the world for some time.  The world currency market seems to agree with the experts, and therefore, the US dollar continues to weaken against the major currencies, such as, the Euro, Yen, and Pound. For example, the Canadian dollar has been weaker than the US dollar for the past 30 years, but this weak Canadian dollar has become as strong as one US dollar.  What does a weak US dollar do to us? What does strong and weak currency mean? See Volume 20.

What does the interest rate cut mean for you?

This past week’s interest rate cut by the Federal Reserve Bank should start to positively impact the consumers and the economy. Consumers should see lower interest rates for borrowing money for home loans, credit card loans, student loans, and auto loans. A lower interest rate will translate into lower monthly payments and therefore put extra money in the consumer’s pocket. With a good credit history borrowers should see an immediate benefit from the Fed cut, especially if their loans were tied to the bank’s interest rates. 

This is great news for the borrowers and the businesses which should see an increase in their products and services sales. If this trend of borrowing and buying of products and services continues then we should see good economic growth in the coming months. Let us watch how it all works out.

What happens to the people who are saving their money in the bank? When the interest rates are cut, the money you save in the bank earns less interest. After some time, people who have their money in the bank earning lower interest rates will have to think if there is another way to put their money to work to get higher interest rates.  Think about what are other ways.

What is APR?

When you borrow money from a bank or any other lender, you have to pay back the borrowed amount and also interest on top of that.  All these payments have to be made within the agreed upon time period.  We can think of interest as the cost of borrowing. 

Suppose you need $1,100 for one year, and your bank offers to lend you and charges 7% interest.  But is that the true interest rate? Not if the bank is asking for some fees, like application fee or credit report fee etc. In that case, your true interest rate will turn out to be higher than the 7% that the bank offered. All lenders are required by law to inform the borrower of the “Annualized Percentage Rate,” also known as APR. APR is a better indicator of what interest rate you are paying on the loan.

In the example above, the interest payments for the year will be 7% x 1,100 = $77. However, suppose that to get the loan you had to also pay a non-refundable application fee of $100. What is your APR?

To understand APR, determine the net amount of cash you get from the bank. You got $1,100, the amount you borrowed, but paid back $100 in application fee.  So the net cash you got was $1,000 (=$1,100 – $100).  However, you still have to pay $77 in interest.  So what is the true interest you are paying?  It is 7.7%, calculated as $77 (your interest payment)/ $1,000 (the net cash).  The APR for your loan will be 7.7%. The higher the fees, the higher will be the APR.

In this example, we assumed that the loan period was one year. If the loan period is more than one year, then APR will be less than 7.7%, but still more than 7%. So next time you borrow money, make sure to ask for APR. 

What is real?

7% APR

or

7.7% APR?

Learn more about…

What is Credit History?  Why is it important to have a good credit history? Volume 12.

What is the Currency and Foreign Currency Exchange rate? Volume 14.  What is a stronger or a weaker currency? Volume 20. 

What are the Economy, Business, Workers, Goods,  Services,  Stocks, the DOW, the S&P500, and the NASDAQ? Volume 16.

How does money grow in a bank? Volume 21.

Coming soon…How to read published stock information?