It’s time to take a look at interest rates
With the rising cost of living, we all need to be careful with our money, that means not only being smart about how we spend money, but also how we save and borrow.
Understanding interest rates is crucial if you’re a saver, a borrower or, like most of us, a bit of both. I know the interest rates are enough to turn most people off but before you go how about the two or three minutes it takes to read this article could save you or earn you thousands of pounds ?
Whether it’s loans, mortgages, credit cards or savings, you have to think about interest rates. Interest can be applied to money borrowed (in effect, you pay to borrow money) or money saved (the bank/building society pays you for the money you actually lent them).
It’s actually deceptively simple, for example, an annual interest rate of 5% means that £5 is paid in interest for every £100 saved or borrowed.
The secret to understanding interest is to know the annual percentage rate (APR) being offered to you.
The APR includes both the cost of the loan and any fees that are included, to give you an overall idea of the debt. For example, the interest rate may be 15% per annum, but the APR is 18% because charges add the equivalent of an additional 3%.
A word to look for is “representative” quoted next to the APR – this word means that just over half of the people who get a loan from this lender have to get the rate listed in the ad for the law to considered representative. . Typically, lenders will tell you “the rate charged will depend on your personal circumstances” and it can be much higher than the advertised rate.
If you think you’ve been offered a higher rate than advertised, shop around and talk to your local credit union as they usually charge “real” rates. In other words, what you see is what you get.
When it comes to getting the most out of your money, understanding compound interest is very important.
Suppose you have £1000 in a savings account paying 10% annual interest. After a year you would have £1,100.
If you didn’t make any more deposits and the interest rate remained the same, in the second year you would earn 10% on that £1,100, or £110 in interest. In year three your starting figure is now £1210 and interest earned at 10% would be £121.
Now for the magic of compounding: leave that initial sum of £1,000 for 20 years, without making any withdrawals and constantly reinvesting the 10% interest and it would become £6,727.50. This represents £5,727.50 in interest.
After 30 years it would have reached a nest egg of £17,449.40 – as long as the interest is constantly reinvested.
For those borrowing money, however, the picture is less rosy. Compound interest can be calculated not only on the amount originally borrowed, but also on any debt that accumulates due to interest charges. In short, this means debt can pile up very quickly, like when credit card debt spirals out of control. This is one of the reasons why at Cambrian interest is always charged on the declining balance, as a member-owned financial cooperative we want to make things a little fairer.