What’s an interest rate - and what do you need to consider?

Interest rates are everywhere when it comes to borrowing money - it’s sometimes hard to escape those % signs. But when it comes down to the detail, how many of us can really say we understand what an interest is and what it means? If you’re not sure, read on...

What is an interest rate?

Interest is the cost of borrowing money. This is usually explained as an annual percentage of a loan. So, when you borrow money you need to repay the amount you borrowed plus an interest rate - this is additional money you have to repay on top of the original amount loaned. An interest rate does not include any fees or charges related to borrowing the money - only the interest.

When you borrow money, what’s really important is:

• Getting as low an interest rate as possible
• Paying back the loan as quickly as possible

If you borrow money over a longer period of time, you will need to pay more interest. When you are taking a personal loan, it’s also important to understand if there are any fees, penalties or charges in addition to your interest. 

Are there different types of interest rates?

Yes, there are fixed interest rates and variable interest rates. 

Fixed interest rates mean that the interest rate will stay the same for the term of the loan. So if you agree to a loan with a 10% interest rate and it’s fixed, it won’t change. 

Variable interest rates are more common with mortgages than personal loans, but in essence it means that the interest rate you agree to when you take the loan is not guaranteed for the duration. It means that your rate can change and can change up to once a year. 

What’s the difference between APR and interest rates?

When it comes to mortgages, car loans, and other types of personal loans, the difference between APR and interest rates is important. In these situations, an interest rate is simply a percentage of the loan which is what you're charged for borrowing. An APR includes other fees that may be charged as part of the lending process.

However it’s worth noting if you are comparing credit cards, there's actually no difference at all.

Click here to read more about APRs and what the difference is between a Representative APR and a personal APR.