Understanding Interest

What's Interest?

Contributors: Nicola Date, Katherine Read. Reviewed by Francis Hui

Why Is Interest So Important in Finance? How Does It Affect the Loans That You Take? We'll Discuss Them Today and Help You Get an Insight Why Interest Is Very Relevant to Today's Market.

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What’s Interest?

Money is a very important topic in the world. People borrow money to do various things, such as buying houses or cars.

It can be hard to find out how much you will end up paying for borrowing money though, which is why it’s important that you know what interest rates are and how they work.

Interest rates are the small percentage of your loan that is paid back overtime to compensate for use of the borrowed funds.

How Do Interest Rates Work?

The Bank of England (BoE) determines the UK’s bank rate or ‘base rate’. This has the potential to influence interest rates set by financial entities like banks.

As the cost of borrowing rises, lenders are likely to want to charge more if the base rate rises.

The same principle applies to savers. If the Bank of England’s base rate rises, the interest you earn on your savings should climb as well.

This is due to the fact that your savings provider has effectively borrowed your money.


What’s Annual Percentage Rate (APR)?

The yearly interest earned by a sum charged to borrowers or paid to investors is referred to as the annual percentage rate (APR).

APR is a percentage that represents the real annual cost of money for a loan or investment over the period of the loan.

This includes any fees or additional costs incurred during the transaction, but it excludes compounding. Consumers can use the APR to evaluate lenders, credit cards, and investment goods since it gives them a single number to compare.


What’s Compound Interest?

It’s also known as compounding interest, the interest on a loan or deposit that is computed using both the initial principal and the interest accumulated over time.

Compound interest, which is said to have originated in 17th-century Italy, is “interest on interest” and will cause a sum to grow at a quicker rate than simple interest, which is computed just on the principal amount.

Compound interest accrues at a rate determined by the frequency of compounding, with the higher the number of compounding periods, the higher the compound interest rate.


In Conclusion

If you’re interested in borrowing money, be sure to research the different types of loans available and understand just how much each type can cost. There are many loan options out there for those looking for a way to borrow money.

Be sure not only to compare interest rates but also other fees associated with these loans before making any decisions on which one is right for you.

Editorial Note: This content has been independently collected by the SovereignBoss advisor team and is offered on a non-advised basis. Sovereignboss may earn a commission on sales made from partner links on this page, but that doesn’t affect our editors’ opinions or evaluations. Learn more about our editorial guidelines.

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Rachel Wait
Personal Finance Journalist

Rachel is an experienced finance journalist and editor with a particular interest in personal finance and consumer affairs. She has vast experience writing about money issues, property, insurance, and consumer affairs, and you’ll find her articles regularly featured in top media and newspaper publications.
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Written by
John Lawson
Founder SovereignBoss

John is passionate about education and has made it his life-long mission to assist UK citizens on their future financial options, with a specialist interest in equity release, and SovereignBoss is the natural extension of this passion.

Reviewed by
Francis Hui
Senior Risk Manager

Having held various high-level roles across the industry, Francis is truly an expert in aiding UK citizens in their financial decisions and risk analysis. His unique insight and statistical knowledge make him the perfect person to help you take your financial future to the next level.
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Katherine Read
Consumer Affairs Writer

Since joining the editorial team at SovereignBoss, Katherine has become focused on bringing transparency to finances and opportunities for those approaching retirement age. She writes on the topics of equity release, home reversion, and mortgages.

Nicola Date
Writer & Journalist

Nicola is a financial writer for SovereignBoss and is passionate about the opportunities that equity release can open up for homeowners. Her extensive business experience and deep understanding of the industry means that she’s always up-to-date with the latest developments.

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