The Definitive Guide To Interest Rates
From credit cards to personal loans, when you borrow money the amount you pay back will always be driven by the interest rate.
Interest rates can also be applied to savings and investments but instead you earn interest on your money.
Understanding how interest rates work will help you make better financial decisions and take control of how your money is working for you. In this guide we explore the following:
- What is an interest rate?
- Interest rates for investors
- Compound interest
- Interest rates for borrowers
What Is An Interest Rate?
For borrowers, the interest rate is the cost of borrowing money, often represented as a percentage of the full amount borrowed (and often includes admin fees and charges).
If you borrowed £1000 at 10%, the total you would pay back to the lender would be £1100.
For savers and investors, the interest rate is how much a financial institution is willing to pay you in return for borrowing your money. The profit on savings is called interest.
As an example, if you put £1000 into a savings account that offers an annual interest-rate of 2%, you would stand to have £1020 after one year.
Best Interest Rates For Investors
You can earn interest on your money in a variety of ways.
Whether you use savings accounts, cash ISAs, bonds, peer-to-peer investments or instant-access savings, you can shop around to find earning opportunities that fit the length of investment and your risk profile.
Often with high-interest investments there will be a higher-level of risk involved but the pay-off can be up to 10 times the interest-rate of the average savings account.
The average interest rate on savings accounts in 2019 sits around 1% – 2%. The average interest rate for a peer-to-peer investment is around 5%.
At Leap, we offer up to 5% return rate when you invest in our peer-to-peer loans. Use our investment calculator to see how much you could make on your money. With any P2P investment your capital is at risk. Your investment is not protected by the FSCS.
Make sure you explore the various investing options and understand the risks involved in high-interest opportunities. Find investments that suit your financial goals.
What is Compound Interest?
When it comes to investing your time is valuable.
Over time, you can earn interest from your interest. This is known as compound interest.
Compound interest is calculated by adding interest to your loan or savings where interest has already been charged or accrued. This means that the added interest charged or earned from previous periods will also have been applied.
Returning to our earlier example, if you put £1000 into a 2% savings account and you had £1020 after one year, you would then go on to earn 2% of £1020 in the second year. Here’s how the your earning would look over a five year period:
Year 1: £1020
Year 2: £1041
Year 3: £1062
Year 4: £1083
Year 5: £1105
What’s the Average Interest Rate for borrowers in 2019?
According to Finder, the average APR on a personal loan in 2019 is 8.04% for £5,000 and 3.9% for £10,000. An overdraft carries an average APR rate of 19.72 %. Credit Cards hit an all time high last year of 24.9%.
If you’re paying more on a high-interest debt, look into refinancing with a low-interest credit provider to help pay off your debts.
Peer-to-peer loans are able to offer comparatively low rates due to the process being entirely online. As the overheads are minimal the savings are passed on to the borrower.
At Leap, based on your credit history and terms selected, we can offer loans starting from 3%. Use our loan calculator to see how much interest you can save when you refinance with P2P loan from Leap.