Question

Interview 1:

Utilizing the internet, friend, relative or personal connection; find a Financial Advisor; Certified Financial Planner or someone in the Financial Services Industry. Ask for his or her assistance for the next month or week. Your assignment is to interview this person and get their opinion on the following topics.

Question #5 & #6

5. What are some of the impacts of low interest rates?

6. Please pose this hypothetical question to the interviewee: " I want to buy a car. What should be my concerns?"

Answer 1

5. Interest Rate is the amount due , per unit period of time and per unit principal borrowed or deposited. If low interest rates are prevailing , some possible impacts are :

1. Low returns on deposits - will create dissatisfaction in savers and indirectly encourage investment in other assets thereby increasing spending.
2. Lower cost of loans - will increase borrowing opportunity and therefore , spending
3. Prices of assets like land and housing might rise as loans become easier to get
4. Currency may depreciate - if domestic interest rates are to fall , investment in the domestic currency will be disfavoured. This will cause the currency to depreciate.
5. Exports favoured, Imports cost increased. - If currency depreciates , more money is received from foreign markets for the same export. But , import costs will rise as more money has to be spent for the same amount of foreign currency.
6. Can cause inflation in the long term - Lower rates of interest will favour spending , putting more money to flow in the market. This will increase demand and ultimately the price , causing inflation.

  

6. WIth the low interest rates denying substantial returns from deposits anyway , if enough funds are available it would not be too unviable to buy the car upfront (without loan). But in view of tax savings and cheap car loans due to low interest rates , taking a car loan is a better idea. If the car is an imported model , costs are definite to rise. Also , if your country imports oil - oil prices will go up. Reselling the car after a few years of use will be a good idea because with the lowered interest rates , more demand and confidence (wealth effect) and inflation , will be present that will help in generating maximal resale value to those who are finding it difficult to buy first hand car with the inflation.