Interest Types: Why is everyone talking about them (and how do they affect you)?

If lately you've heard about interest rates, mortgages and the famous Euribor, and you have the same feeling as when they talk to you in Chinese... Welcome to the club! Let's make this simple: understanding interest rates will not only make you look like an expert at the next family dinner, but it will also help you make better decisions for your wallet.

What are interest rates?

Imagine that money is a product, like Starbucks coffee (yes, that expensive sometimes). When you borrow money, whether it's to buy a car, a house or a ticket to the summer festival, you're not just taking money; you're renting it out. And as with any rental, you have to pay an “extra” to use it. That extra is the interest rate.

Interest rates = price of money. When interest rates rise, asking for money becomes more expensive. When they go down, it's cheaper. And as always, the trick is knowing when to order (and when it's best to avoid it).

Interest rates and the European Central Bank (ECB)

Okay, but who decides if interest rates rise or fall? This is where the European Central Bank (ECB) comes in, which is like the DJ at a party: it sets the pace of the economy. If inflation (that is, the price of everything goes up) is skyrocketing, the ECB raises interest rates so that people think twice before taking out loans. Thus, an attempt is made to “cool” the economy and control prices.

Why does this affect me? Well, if you have a mortgage, a loan, or even if you save, changes in interest rates impact you. When they rise, mortgage payments may increase, while your savings may start to yield more (finally the bank pays you something for your money!). On the other hand, when rates fall, borrowing becomes more accessible, but saving is less profitable.

The three interest rates you should know

1. Fixed interest rate: As the name suggests, this type doesn't change. If you have a fixed-interest loan, you'll know from day one how much you'll pay until the end. It's like a Netflix subscription: you pay the same amount every month, with no surprises. The advantage is that you know how much you are going to pay, no matter what happens in the economy. The downside: If interest rates fall, you stay the same.

2. Variable interest rate: This is where the roller coaster begins. This interest rate usually fluctuates depending on the Euribor, the European benchmark for loans and savings. If the Euribor goes up, your interest goes up; if it goes down, your interest goes down. It's like joining a gym that changes the price of the fee depending on the time of year: in summer, when everyone wants to go, they raise your rate.

3. Mixed interest rate: Here the two worlds are combined: you pay a fixed rate for the first few years (5, 10 or whatever you have agreed) and then you switch to the variable rate. It's like taking out comprehensive insurance the first year and then taking out liability insurance. It can be an interesting option if you don't want surprises at the beginning and have room for maneuver later.

How do interest rates affect the economy?

It's not just your mortgage or your credit card. Interest rates affect the entire economy: from housing prices to investments and savings. For example, if rates are high, buying a home will be more expensive (which is why loans are more expensive), and you may decide to stay where you are and save instead of spending. And when everyone saves and no one spends, the economy cools down.

But beware! If rates are low, the opposite can happen. Everyone buys, borrows and spends, which can lead to the prices of things rising... and then to rates rising again. It is an endless cycle that tries to keep the economy stable and balanced.

In short

The next time someone talks to you about interest rates, you know what it's all about. And remember, it's not just about numbers and percentages. Interest rates can impact your life, from how much you pay for your flat to whether you should keep those savings or invest them. The key? Stay informed and make smart decisions for your money.

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