Interest rates are big news when they change – but why? If you’re not familiar with what they are and how they affect you, here’s our quick guide to what it all means.

interest rate definition :

An interest rate is a financial metric used to quantify the price of borrowing capital or the compensation for lending money or investing funds over a specified period, often expressed as a percentage of the original sum, typically on an annual basis. It is a critical tool in the realm of finance and economics and plays a pivotal role in shaping various financial transactions, including loans, bonds, savings accounts, and investments.

Interest is the extra cash you get charged for a loan

If a friend loans you £10 at a 10% interest rate, you’ll pay them back £11. That’s the £10 you borrowed plus an extra £1 (10% of £10) as interest. Banks have more complicated ways of calculating this, but that’s the general idea.

Rates are just how much interest you pay

If you hear about rates going up, that means you’ll pay more interest on borrowed money. You might also hear people talk about getting better rates on some bank loans, or really high rates on things like credit cards and payday loans.

How high could interest rates go?

The Bank of England may increase interest rates if it thinks prices are going up too quickly – called inflation. Higher interest rates can discourage people from taking out loans or spending on their credit cards. This means people have less money to spend, so price rises slow down. But, it can hurt people already struggling to afford things, and there is no telling how high rates could eventually climb.

But high interest rates can be good, too

If you have money in savings, higher interest rates should make the interest you earn on your funds go up – since you’re basically loaning the bank your money while they hold on to it. But banks are often pretty slow to pass on the extra cash to customers – and sometimes don’t bump up their payouts at all.