Interest enables a lender to profit on what they are providing to a borrower. Essentially, it’s the cost of debt.
The percentage charged is dependent on an individual’s risk level. The lower the risk, the higher the interest rate charged.
The Annual Percentage Rate (APR) is the interest that is charged for access to credit cards, personal loans or mortgages.
The Annual Percentage Yield (APY) is what is earned on savings or investments.
If it is fixed, then it remains constant throughout the loan term. If it is variable, then it fluctuates along with the prime lending rate. When the latter increases, then entities have to pay more towards their credit agreements and when it drops then there is less expenditure.
In South Africa, it is determined by the South African Reserve Bank (SARB). The repo rate is the rate at which commercial banks are lent to by the SARB. When it increases it affects how banks charge clients.
If the interest rate rises, then it may encourage saving, mainly because savings will earn more money. It could also lead to less disposable income available for households as a result of more debt repayments being made.
Interest may be compounded or simple. The latter is calculated as a percentage of the initial amount. The former is worked out on the entire balance, along with previous interest payments. This rate exists as a way to influence financial decisions made. If household spending needs to be curbed, they can be used to influence decision-making. Not to mention the ways it can be used to drive increased saving. A sharp incline will lead to more people depositing their money into savings accounts and investing as a result of there being more returns.
