What role do interest rates play in borrowing?

Interest rates are crucial in the borrowing process as they influence both the cost of loans and the overall capacity of an individual or business to borrow funds. Specifically, when interest rates are higher, the cost of borrowing increases, leading to higher monthly payments and potentially making it more difficult for individuals to qualify for loans. Conversely, lower interest rates reduce the cost of borrowing and can allow borrowers to take on larger loans or afford to repay loans more easily.

This impact on borrowing capacity and loan costs is vital for decision-making regarding large financial commitments, such as mortgages or personal loans. When interest rates are set, they define how much additional money will be paid back on top of the principal amount borrowed, ultimately shaping an individual's financial strategy and ability to access credit.

The other options address aspects of borrowing that are not directly related to interest rates. Payment frequency relates to how often payments must be made, which is generally determined by the loan terms rather than the interest rate itself. Interest rates do not eliminate the need for credit; instead, they affect the terms under which credit is obtained. Lastly, while interest rates do influence savings account interest, this is not a direct role in the context of borrowing.