There are both positive and negative effects resulting from the historically low interest rates that have been present since the 2008-2009 financial crisis. These low rates have most significantly affected four groups: borrowers, lenders, savers, and retirees.
• Borrowers : Low interest rates are favorable for borrowers, and are in fact an incentive to borrow money. Loans with lower interest rates ultimately mean that borrowers are able to access money for lower costs over the life of the loan.
• Lenders : Low interest rates mean that lenders see increased business from those looking to borrow money. While these rates may help to prop up large financial institutions, some believes they also help protect banks from the consequences of questionable decisions and redistribute wealth away from those that would normally save their money.
• Savers : Low interest rates dampen the incentive to save money. Banks are paying less than 1% interest on savings, leading savers choosing to put their money elsewhere. The inflation-adjusted real interest rate results in money saved not keeping up with inflation, meaning that savers are actually losing money!
• Retirees : Low interest rates reduce income to retirees and pension funds. This means that retirees have to access the principal of their retirement accounts instead of just receiving interest payments. This could lead to more retirees accessing welfare programs, or for the government to increase financial support of underfunded pension funds.
Suppose your retired parents have told you about a financial advisor who has approached them with a "sure-fire" way to earn higher returns on their savings. Your parents have expressed concerned regarding the extremely low rates they are currently earning and are very interested in a way to earn more.
Today's historically low interest rate environment, stemming from the 2008-09 financial crisis, means that retirees and savers have seen a significant decline on their interest earnings. Many retirees now need to access the principal of their retirement funds instead of relying on regular interest payments.
In addition, banks have been paying less than 1% on traditional savings account , meaning that the money saved is not keeping up with the inflation-adjusted real interest rate.
This low interest rate environment has led many savers and retirees to search for higher returns , sometimes with investments of questionable risk. Your parents should be informed that there is no "sure-fire" way to earn higher returns on savings.
In addition, any attempt to earn higher returns should be tempered by the consideration of the higher risk that is involved. Perhaps your parents should consider high-quality corporate bonds, or even stocks as a new investment direction.
Basic operations and products and services offered by different financial institutions:
The basic operations and products and services offered by different financial institution are tabulated below:
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