How does a high-interest rate affect borrowing costs?

A high-interest rate increases the overall cost of borrowing because borrowers are required to pay more in interest over the life of the loan. When interest rates are high, lenders charge more for the money they lend, which in turn raises the total amount that borrowers will repay compared to a lower interest rate scenario.

For example, if someone takes out a loan of $10,000 at a high-interest rate, the amount they will have to repay will be significantly larger than if the same amount were borrowed at a lower interest rate. This happens because interest is calculated as a percentage of the principal amount, so with higher rates, the interest charged each month or period will also be higher, thus increasing the overall repayment amount.

In addition, high-interest rates can create a discouraging effect on borrowing and spending, as individuals and businesses may reconsider taking out loans, impacting economic activity. Understanding how interest rates affect borrowing costs is crucial for managing personal finances effectively, as it directly influences decisions regarding loans, credit cards, and other forms of debt.