What Exactly Is an Interest Rate?

An interest rate is the price of borrowing money. When you take out a loan, you pay interest to the lender. When you put money into a savings account, the bank pays interest to you. Interest is expressed as a percentage and affects how your balance changes over time. Even small differences in rates can significantly impact your finances.

How Interest Rates Affect Loans

When interest rates rise, borrowing becomes more expensive. When they fall, borrowing becomes cheaper. This affects:

• Credit cards (variable rates that change often)

• Mortgages (large loans where small rate changes matter a lot)

• Car loans

• Personal loans
  For example, a 1% change in a mortgage rate can add or save thousands over the life of the loan. That’s why timing and comparing lenders are so important when taking on debt.

Fixed vs. Variable Rates

Loans typically come in two forms:

• Fixed rates stay the same over time. You know exactly what you’ll pay each month.

• Variable rates change based on the market. Payments may rise or fall.
  Fixed rates offer stability. Variable rates offer flexibility but come with more risk, especially when interest rates are rising.

How Interest Rates Affect Your Savings

Interest doesn’t only affect your borrowing — it also affects your earning. When interest rates rise, your savings accounts and fixed deposits may offer higher returns. When rates fall, savings growth slows down.
Accounts impacted include:

• High-yield savings accounts

• Certificates of deposit

• Money market accounts
  Even though savings interest rates are usually low, they add up over time and help your money work for you passively.

The Link Between Inflation and Interest Rates

Central banks adjust interest rates to help control inflation.

• When inflation is high, they raise interest rates to reduce spending and borrowing.

• When the economy slows down, they lower rates to encourage activity.
  These decisions directly impact your financial life, especially if you’re borrowing or saving.

Everyday Costs Are Affected Too

Interest rates influence more than loans and savings. They can affect:

• Credit card balances

• Monthly instalment plans

• “Buy now, pay later” fees

• Car payments

• Housing costs
  Higher interest rates can make everything from buying a home to financing a phone more expensive.

How to Make Smart Decisions With Interest Rates

A few simple habits can help you stay in control:

• Shop around before taking any loan

• Prioritize paying off high-interest debt first

• Build emergency savings to avoid borrowing in emergencies

• Review your credit score to qualify for better rates

• Consider refinancing loans when rates drop
  Understanding interest rates lets you choose the best timing and avoid paying more than necessary.