How does interest work?

‘Interest’ is the price paid to borrow money over time; for example, a lender may charge a debtor a fixed fee based on the amount of money they wish to borrow. In this instance, this ensures that the lender can both recoup their losses from lending the money in the first instance, and can make a profit from the activity of lending money itself.

What are fixed interest rates?

‘Fixed’ interest rates are unchanging rates on a savings product or loan that do not differ over time. Generally, this means that the interest rate you are offered or charged when opening a new product will remain the same as long as you remain compliant with the terms and conditions of the product itself.

Fixed interest rates are useful as market conditions change or other factors may force the value of variable interest rates to change; meaning that you can enjoy peace of mind either in the cost of what credit you apply for, or the growth of any savings products you may have.

What are variable interest rates?

Variable interest rates change over time or per market-related events, meaning that the growth of funds or the rate charged on a loan can differ from their original agreement.

Variable interest rates on a loan may be linked to the prime lending rate – which is the rate at which banks borrow money from the central banks, and is typically enforced by the treasury – or to other activities.

Variable interest rates on savings products may differ as funds accumulate over time, on the amount of deposits made over a certain period, or could also be linked to other activities.