When you borrow money, you are charged on the amount you borrow. How much interest you pay depends on a range of factors such as the amount you borrow, the length of time you borrow it for, your credit riskiness (e.g., credit score), whether the loan is secured against any assets (e.g., mortgage or car finance), and what you are borrowing it for.

On the other hand, you are paid money depending on the amount you save when you save money in an interest-paying account.

Interest is normally charged as a percentage of what you borrow or paid as a percentage of what you save.

There are many different interest rates:

• The Bank Rate - This is the most important interest rate in the UK. It is normally called the base rate because this is the rate that the Bank of England charges financial institutions. The rate is decided by 9 economists that form the Monetary Policy Committee who meet 8 times a year to monitor the performance of the economy. This rate influences every other rate such as those issues to borrowers or savers.

• Borrowing Rate - The rate a borrower pays varies depending on the borrower and the type of loan they are taking out. Mortgages usually have rates of interest because they are secured loans which means that if the borrower defaults, the bank can take the asset (the house) and sell it. Credit lines such as credit cards and overdrafts have a much higher percentage rate of interest because they are unsecured loans, - if the borrower defaults, the bank has little chance of recovering the money. Other factors such as how risky the borrow is perceived to be, can influence the rate the borrower pays.

• The Savings Rate – This rate is normally a lot lower than the borrowing rate, and in recent years in the UK, it is consistently under 1% for most financial institutions. This is what financial institutions pay you for keeping your spare cash in their interest-paying accounts. The rate you are paid can depend on a range of factors such as the financial institution that you are with, the type of account you open – e.g., ISA, or if the account is easy-access or a notice account.

Why Do Interest Rates Change?

Interest rates normally change when the Bank of England changed the base rates. It may increase the base rates if the bank wants to slow down the economy by getting people to spend less and save more. Increasing the base rate will increase savings rates and borrowing rates making it more rewarding to save as well as making it more expensive to borrow.

On the other hand, the bank may reduce the base rate to speed up the economy, lowering both savings rates and borrowing rates. This will make it less attractive to save and more attractive to borrow money to spend.

People who are on variable rate mortgages will also benefit from a reduced bank rate as they will be paying less in interest payments, therefore having more money to spend monthly.

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