Have you ever wondered how interest rates can impact your finances as a freelancer in Mexico?

Interest rates influence everything, whether you're seeking a loan to boost your business or evaluating your investment options. These reasons are enough for you to discover what they are and how they work.

Interest Rates in Mexico: What They Are and How They Impact Your Financial Decisions

Definition and Types of Interest Rates

In simple terms, an interest rate is the cost of money.

If you take out a loan from the bank, the interest rate is the amount you'll pay for using that money. Conversely, if you deposit money into a savings account, the interest rate refers to the percentage you earn for allowing the bank to use your funds.

There are two main types of interest rates used to determine how to settle a debt, in the case of loans:

Fixed Interest Rate: This rate remains the same throughout the loan period.
Variable Interest Rate: This rate fluctuates based on market conditions, meaning it can go up or down during the loan period.

For instance, if you borrow money from a bank to expand your freelance business, it's advisable to look for banks offering fixed interest rates.

How Interest Rates Work for Loans and Savings

This percentage plays a crucial role in both loans and savings.

Interest Rates for Loans

Banks set interest rates for mortgages, credit cards, or personal loans, for example. A high-interest rate means you'll pay more in interest over the life of the loan, increasing the total loan amount.

Interest Rates for Savings

Banks offer a percentage to encourage you to deposit money in your savings account or certificates of deposit (CDs). Here, a high-interest rate translates to higher returns, thus increasing your savings over time.

Suppose you want to make a significant purchase, like a larger space for your business. Obviously, you'll prefer a loan with low-interest rates, right?

However, this depends on the financial institution, so it's wise to compare your options. Even a small difference can significantly impact your monthly payments, especially for long-term loans.

On the other hand, if you receive remittances, you'll want high-interest rates for your savings account, as you'll earn higher returns on those funds.

Reasons for Charging Interest Rates

Interest rates are charged for various reasons.

Firstly, they act as a form of insurance for the bank against the risk of lending you money. If inflation is high and the risk of default is also high, interest rates are likely to be higher to compensate for these factors.

Additionally, financial institutions always earn something, just as they do with international bank transfers.

Moreover, interest rates also serve as an incentive for saving. By offering returns on funds in savings accounts or investments, banks encourage you to save money for the future, promoting financial stability and economic growth.

How Interest Rates for Personal Loans Work in Banks

These types of interest rates are determined by considering factors such as:

The bank's monetary policy.
The cost of funds for the bank.
The borrower's credit risk.
Market conditions.

Banks also evaluate your creditworthiness before approving a loan. They review your income, employment, credit history, and other aspects to assess the risk of default.

However, loans can be subject to additional charges, such as insurance, opening fees, and late payment penalties. For example, at BBVA Mexico, if your credit evaluation is positive, you receive a pre-approved invitation.

You have the option to get financing without a guarantor, facilitating the process for various purposes. Additionally, you can adjust payment terms between 6 and 12 months to suit your financial needs.

How Interest Rates Influence Financial Decision-Making

Interest rates have a significant impact on the financial decisions of any freelancer, whether working solo or planning to start a business.

Loans and Credits

When interest rates are low, the cost of borrowing decreases, making it feasible to finance purchases or significant investments for your business, such as upgrading equipment or opening a new office. However, when interest rates are high, you may hesitate to take out a loan due to the higher interest amount.

Savings and Investments

For savings, the opposite is true. The higher the rate, the better, as your account's return also increases, encouraging you to save more. Consequently, it's possible to build a financial cushion for times with lower income.

However, low-interest rates might prompt you to look for more profitable investment options, such as investment funds or stocks. Understanding how they work and influence different economic aspects will help you make more informed and strategic decisions.

It's also crucial to understand how international transfers work with IBAN and BIC/SWIFT codes, especially if you have clients abroad and need to receive dollars in an account. DolarApp is another excellent way to make these transactions with flexible exchange rates.

Interest Rate Example

Suppose you borrow 10,000 MXN from the bank, and the annual interest rate is 10%.

Interest Rate Formula:

The formula is the same as for compound interest.

Amount to be repaid =Initial Loan Amount× (1+Interest Rate)n.
Initial Loan Amount = 10,000 MXN.
Interest rate = 10% or 0.10.
n = 1 year.

Assuming you make no payments in the year and the interest is compounded annually, it would be:

Amount to pay = $10,000×(1+0.10)1.
Amount Due = $10,000×1.10.
Amount Due = $11,000.

The total cost to be paid to the bank at the end of the year is: MXN 11,000. This includes the initial $10,000 pesos, plus the $1,000 MXN interest earned during the year.

The example is a simple calculation, but it gives you an idea of the interest that can accrue per year on a bank loan.