Interest rate is the amount of money a financial instution (normally a bank or building society) will charge you to lend money.
The rate of interest charged depends on a number of different things:
- The amount you want to borrow. Generally the more you wish to borrow, the lower the interest rate you will be offered.
- The reason you want to borrow the money. Some reasons for lending are "less risky" to a financial institution than others. For example, with a secured loan, if a customer wants to borrow money for home improvements then this will be seen as a lower risk loan as home improvements will generally increase the value of the property and as such, increase the value of the property the secured loan is secured against.
- The current bank of England base interest rate. This is the base interest rate that banks borrow money at. They then add an amount to this which is how they generate their profit.
- Your personal circumstances. There is lots of information that will be asked of you before any financial institution will lend money to you. Most of this information can affect the interest rate you receive, for example people who have bad credit history can sometimes be charged a higher rate of interest than someone with a pristine lending history. This is not always the case with a secured loan as these loans are secured against equity in a property and as such are less risk than an unsecured loan.
- International market movements. Events in the worlds financial markets can also have an effect on the rate of interest. This could be for many reasons, but are beyond the scope of this article.
To ensure you get the best rate for your secured loan, it is best to use a service which will compare quote from all the different loans and tell you which is cheap (in case a premium is payable) and the lowest rate (and with additional information, which one is right for you). This is as easy way of saving money as over the course of a loan, a small change in interest rates can result in a big difference to the amount paid back.
Rates do not just relate to lending, there are many different rates for all sorts of products and services from a wide range of businesses for example currency exchange rates.
The interest rate set by the bank of England also affects the interest rate for some saving accounts. With some mortgage types e.g. an overdraft mortgage the interest rate will affect how much your savings contribute towards reducing your mortgage balance.
