Interest Rates
Business: Edexcel IGCSE, topic 1.6.3
Interest Rates
Interest rates are effectively the price of money. Interest is charged on any money that people borrow and this is paid to lenders.
Interest payments
- When consumers or businesses borrow money, they usually pay back more than they borrowed. This extra amount is called the interest payment.
- The interest rate is the percentage of the loan that is charged as the price for borrowing.
Saving vs borrowing
- When people save money, they get paid interest by the bank.
- Therefore, the higher the interest rate, the more expensive it is to borrow money and the better it is to save money.
Impact on loans
- When interest rates are low, more companies will borrow money because it is cheaper to do so.
- This is likely to lead to more investment and higher growth for businesses.
- When interest rates are high, the opposite is true.
Impact on consumer spending
- When interest rates are low, consumers are less likely to want to save because they get less money in return for saving.
- This means that the demand for goods and services goes up as people spend more of the money they earn on goods and services.
- When interest rates are high, people have more of an incentive to save money. But the interest rates on their mortgage payments also rise.
Test yourself on Interest Rates
Which of the following is true when interest rates are low?
What is an interest rate?
How much money do businesses normally pay back when they loan money with a 1% interest rate?