5 Benefits of High Interest Rates

You might think that there is nothing but bad news that follows a period of high interest rates. Maybe you believe that because, as of this writing, we’ve been in a period of low interest rates for years and you can’t imagine that there’s a good side to higher rates.

The fact of the matter is that there is a downside to high rates. Corporations find it harder to borrow money and that means that they might not raise the capital they need to stay in business. That could ultimately result in layoffs. Also, people who want to buy a home might struggle with high mortgage payments when interest rates skyrocket. Finally, auto loan interest rates will be high as well, limiting growth in the automobile industry.

However, there are two sides to that coin. Not all of the news is bad when it comes to high interest rates.

Better Returns as a Lender

High interest rates are a blessing if you’re a lender. You might think that you’ll never be a lender, but that’s probably not the case.

For one thing, when you open a savings account, you’re effectively lending the bank your money. That is, after all, why the bank pays you interest. As a result, you’ll find some very attractive interest rates on various savings account options at your local banks when interest rates are high.

Also, you can loan money to corporations. Many trading platforms now allow you to buy corporate and municipal bonds for investment purposes. If the country does enter a period of higher interest rates, consider putting some money into your favorite online brokerage and start buying bonds. You’ll enjoy a return that’s often superior to that of a savings account. In the case of municipal bonds, your income is also tax-free.

Stability in the Stock Market

When interest rates are low, investors will often take risks to get a higher return on their investment. As a result, the stock market can often fluctuate wildly in a low interest rate environment.

On the other hand, when interest rates are high, investors take advantage of debt securities for a higher return. That leads to less speculation in the stock market. As a result, the market tends to fluctuate less when interest rates are high.

A “slow and steady” stock market is great news for long-term investors who just want to park their money in an index fund and watch it grow.

Lower Commodity Prices

Companies that produce commodities such as coal and steel are incentivized to produce more of their product when interest rates are high. That’s because they can invest their profits in debt securities and make money.

When commodity producers are offering more of their products on the market, then the prices of those products will go down, all other things being equal. That’s good news for cash-strapped buyers who are stuck with paying high interest rates to their lenders.

Although personal loan interest rates can be difficult to afford when rates are high, there are economic benefits to high interest rates as well. High rates benefit lenders, people who prefer stock market stability, and commodity buyers.