There’s been a lot of talk about interest rates recently, and with good reason – understanding them can reap financial dividends right now and in the future. Essentially, interest is the fee charged (or earned) when you borrow or save money, and it’s an important part of your financial life.
You’ll find interest in a variety of settings, from mortgage loans to credit cards to savings accounts. The higher the interest rate, the more you’ll pay to borrow, while a lower one means you’ll pay less.
The way interest is calculated depends on whether you’re borrowing or saving, and it’s often expressed as a percentage of the principal sum lent or deposited, usually over a period of time such as a year. This is also known as the nominal interest rate, but there are other calculations that take into account compounding (which occurs each month, for example) to give a more accurate picture of your true costs.
High street banks set their interest rates, which are influenced by many factors including the state of the economy and the amount of risk involved. For example, a mortgage loan is typically secured by a property, meaning the bank can foreclose on the asset if you default. This reduces the risk to the lender, and so it may be able to offer a better interest rate than personal loans or credit card debt that isn’t backed by any collateral.
Choosing between a fixed or variable interest rate can be a tough decision, but it’s worth taking the time to understand the differences, consider your own financial situation and risk tolerance, and speak with a trusted financial advisor. The right interest rate can help you reach your long-term goals and achieve your financial dreams.
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