We have all heard about interest rates, which is not surprising as most of us have saved or borrowed at some point. We probably think we know everything about them too. But what are interest rates? Let’s take a deeper dive.
What Are Interest Rates? Rates Affect Us All
Interest rates affect most of us. You might not realise it, but a change in interest rates can impact your day-to-day life; from the cost of getting a loan, through to the prices of everyday goods.An interest rate is a percentage charged on the total amount you borrow or save. Even a small change in interest rates can have a big impact. It’s important to keep an eye on whether they rise, fall or stay the same.
What Are They?
If you’re a borrower, the interest rate is the amount you are charged for borrowing money. This is displayed as a percentage of the total amount of the loan. So if you borrowed £100 with a 10% interest rate over a year, you’d pay back £110. Loans are useful as they allow you to borrow funds to purchase something today and pay for it later. Interest is what you pay for the privilege. It’s a bit like hiring a vehicle on holiday. Interest is what you pay to ‘hire’ someone else’s money. If you’re a saver, it’s the same except the interest fee is paid to you. This is because financial institutions are paying to hire your money. After all, if a lender is to give you money, they want something back in return. They are not a charity, after all.