Why is it essential to understand interest rates?

Understanding interest rates is crucial because they significantly impact decisions related to borrowing or investing money. Interest rates represent the cost of borrowing or the return on investment, so they directly affect how individuals and businesses make financial choices. For example, a higher interest rate may discourage borrowing because loans become more expensive, while a lower interest rate might encourage borrowing as it reduces costs. Conversely, for investors, interest rates can signal where to place their money, making them a vital factor in investment strategies. Therefore, knowledge of interest rates empowers informed financial decision-making.