What is the likely effect of an increase in interest rates on borrowing?

What is the likely effect of an increase in interest rates on borrowing?

• A. Borrowing becomes more expensive
• B. Borrowing becomes cheaper
• C. No effect
• D. Savers' returns decrease

Answer: (A)

When interest rates rise, the cost of borrowing goes up because the interest charged on loans increases. Lenders raise rates to reflect their higher funding costs and the higher return buyers demand, so new loans—whether for a mortgage, car, or personal loan—come with higher interest payments. For fixed-rate loans, the annual cost is higher, and for variable-rate loans, payments can climb as rates adjust. This makes borrowing more expensive and can reduce the amount people and businesses are willing to borrow. In contrast, savers typically earn more on deposits when rates rise, so the idea that savers’ returns would decrease isn’t aligned with how rising rates usually work.

When interest rates rise, the cost of borrowing goes up because the interest charged on loans increases. Lenders raise rates to reflect their higher funding costs and the higher return buyers demand, so new loans—whether for a mortgage, car, or personal loan—come with higher interest payments. For fixed-rate loans, the annual cost is higher, and for variable-rate loans, payments can climb as rates adjust. This makes borrowing more expensive and can reduce the amount people and businesses are willing to borrow. In contrast, savers typically earn more on deposits when rates rise, so the idea that savers’ returns would decrease isn’t aligned with how rising rates usually work.