What are interest rates?
An interest rate tells you how high the cost of borrowing is or how high the rewards are for saving.
It is the amount a lender charges a borrower and is a percentage of the amount loaned. A borrower that is considered low risk by the lender may have a lower interest rate, while a borrower that is considered high risk may have a to pay a higher interest rate on the loan.
The interest rate on a loan is typically noted on an annual basis, known as the annual percentage rate (APR). The higher the percentage, the more the borrower must pay back for a loan of a given size.
If you’re a saver, the savings rate tells you how much money will be paid into your account, as a percentage of your savings. The higher the savings rate, the more will be paid into your account for a given sized deposit over a specific period of time.
The interest rate charged by banks is determined by several factors. In the UK, the Bank of England sets a ‘base rate’, and each bank uses it to determine the APR range they offer. When the central bank sets base interest rates at a high level the cost of debt rises. When the cost of debt is high, it discourages people from borrowing and can slow consumer demand. Interest rates can often rise in response to economic growth and inflation.