Effect of Interest Rates

An interest rate is the price or cost of borrowing money.

For example you might borrow £1,000 from a bank. However, they will not give you the money for free you will have to repay the £1,000 plus interest. AND

The reward for lending money

If you put money into a bank you will gain interest as a ‘thank you’ for lending the money.

CHANGES IN INTEREST RATES

Banks and building societies regularly change their interest rates. A change will have a major impact upon consumers, savers, borrowers, homeowners and businesses.

INTEREST RATES GO UP

Group	Effect	Knock-on
Consumers	Costs more to take out a loan to buy a car or a kitchen	Less likely to buy expensive goods
Borrowers	Their loan repayments may increase	Less money to spend on other goods
Savers	They get a better return on their savings.	More likely to save than spend
Homeowners	Their mortgage repayments increase	Less money to spend on goods and services
Businesses	Loans for expansion cost more	Less likely to expand or buy new equipment

INTEREST RATES GO DOWN

Group	Effect	Knock-on
Consumers	Costs less to take out a loan to buy a car or a kitchen	More likely to buy expensive goods
Borrowers	Their loan repayments may decrease	More money to spend on other goods
Savers	They get a lower return on their savings.	More likely to spend than save
Homeowners	Their mortgage repayments decrease	More money to spend on goods and services
Businesses	Loans for expansion cost less	More likely to expand or buy new equipment

n.b also be aware that a rise in interest rates also tends to cause a stronger £ and vice versa