What is Interest?


What is interest?

Interest is the charge we pay when we borrow money.

Interest can either be fixed or variable.

If it is fixed this means it doesn't change whilst when it is variable this means it can move. The way it moves is dependant on the lender but typically variable interest moves in line with the Bank of England interest rate. Why?

Because the Bank of England is the main lender to your bank or high street lender. So the interest rates which the bank of England lends to others is the main determining factor on the rates they charge.


Simple vs Compound interest

Interest can also be simple or compound.

Simple interest is when interest is calculated only on the amount borrowed or the amount saved.

Compound interest is when interest is calculated the amount borrowed or saved plus accrued interest or charges.


What you need to know

You will likely pay and receive interest at different points in your life. If you loan something out you will receive interest and if you borrow something you will pay interest

When saving or investing, compound interest is an amazing thing. However when borrowing compound interest is a horrible thing.

Variable interest rates can spiral out of control and fixed interest rates might be better if you have dependants(people you look after) and need certainty in how much you spend per month.

To get the best interest rates when borrowing you should have a good credit score, ideally a good amount of collateral or deposit.


What affects the interest offered to you?

There are a few factors that affect the interest rate offered to you.

Higher terms usually seem more risky so higher interest rates.

If you have a bad credit score you will also get a higher rate.

If the next best credit alternative is a higher interest rate then you will likely be offered one too.
You should always compare interest rates before choosing saving or debt products.

Subscribe to Huuti