A Beginners Guide to Interest Rates

Guide to Interest Rates | UK

If you’re a saver or looking to take out a loan, mortgage or credit card, then you’ll need to understand interest rates.

Interest rates are the cost, or in the case of savings the reward, for saving money. For the purpose of this blog, we’ll discuss interest rates on loans as there are a few areas relating to interest rates that you should be aware of.

Read on to discover some of the key elements of interest rates that will affect your loan amount, regardless of if you’re applying for a mortgage, a credit card or a loan.

Interest rates can change

When you initially start looking for a loan of any kind, the financial services provider has to give you an interest rate so you can work out how much it will cost you to borrow that amount over a set period of time.

However, for non-fixed term mortgages and some loans, interest rates can change, making the cost of borrowing more expensive or cheaper.

For example, if you have a mortgage over 25 years on an amount of £130,000 at 2.5% interest, you’ll be paying £271 each month in interest alone.

However, if this increases by 1%, your monthly interest payment will rise by an additional £109. If it falls by 1%, you’ll pay £109 less, so you need to be aware that the cost of your borrowing can both increase and decrease.

The Bank of England Base Rate influences other interest rates from other financial services providers and is set eight times a year. This means the interest amount you pay on any cash borrowed may rise or fall several times each year too.

Not everyone gets the interest rate advertised

Financial services providers try to tempt us to take out their loans by offering attractive interest rates, but sadly not all borrowers are eligible for those best offer interest rates.

Generally speaking, only those with excellent credit scores are able to get the best rates. Those with less than perfect scores are often given higher interest rates. You won’t know for sure what interest rate you’ll get until you apply. It’s worth checking out one of the many free online eligibility checkers before you make any loan application as they give a good indication of what you’re likely to be accepted for and the associated interest rate.

You can make big savings on interest by repaying the loan early

The best way to save money on interest rates is to repay the full amount as quickly as you can. For some loans and mortgages, there is an early repayment fee, but it is often far lower than the interest that you’d pay over the full term of the loan. If you repay the balance before the end of the loan term, you will pay less interest than simply continuing to make the monthly agreed payment. Don’t forget to ask your lender if there are any fees associated with early loan repayment and see if you can save a little extra to clear the debt faster.

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