Imagine you lend a friend £10, and they give you back £11.

That extra £1 is the interest.

It’s the cost of borrowing money, or the reward for lending it.

When it comes to your finances, interest rates play a big role in how much your money grows, or how much you end up paying.

The Money Part: What Interest Rates Are and How They Work

Interest rates are the percentage charged on borrowed money or earned on saved money.

• Borrowing: When you take out a loan or use a credit card, you pay interest on the money you borrow.
• Saving: When you put money in a savings account, you earn interest on your savings.
• Base Rate: The Bank of England sets the base rate, which influences the interest rates offered by banks and lenders.
• Compound Interest: Interest can compound, meaning you earn interest on your interest, which can make your savings grow faster over time.

Interest rates are a key factor in how your money behaves.

The Real Life Part: Feeling the Impact of Interest Rates

Interest rates aren’t just numbers on a bank statement. They affect your ability to achieve your financial goals and how you feel about your money.

Think about a mortgage.

When interest rates are low, your monthly payments are more manageable, making homeownership feel within reach.

When rates rise, that dream can feel more distant, adding to financial stress.

Or consider your savings.

Seeing your money grow at a decent rate can provide a sense of security and optimism for the future.

On the other hand, low interest rates can make you feel like your savings are stagnant, leading to frustration.

• Affordability: Interest rates affect the cost of borrowing, influencing your ability to afford loans and mortgages.
• Savings Growth: They determine how quickly your savings grow, impacting your long-term financial plans.
• Financial Planning: Understanding interest rates helps you make informed decisions about borrowing and saving.

Knowing how interest rates work empowers you to make smarter financial choices.

Tips for Understanding and Managing Interest Rates:

• Monitor the Base Rate: Keep an eye on the Bank of England’s base rate announcements.
• Compare Interest Rates: Shop around for the best interest rates on loans and savings accounts.
• Understand Compound Interest: Learn how compound interest can work for or against you.
• Review Your Finances: Regularly review your loans and savings to ensure you’re getting the best rates.