You’ve probably heard the term ‘interest rates’ used a lot in the media, especially when decisions are made about whether to raise or cut them. But, how does it affect your savings and how much you pay on your loans? Here’s a quick explainer.

What are interest rates and how do they affect loans?

Interest is the amount of money a lender charges you for borrowing, on top of the loan. If a bank or other financial institution decides to lend you money, they don’t do it for free. They charge a certain percentage in addition to the money they owe you: the percentage is the interest rate. You have to pay back both the loan amount (otherwise known as principal) and the interest.

Say someone borrowed $100,000 for a big purchase over 10 years, with monthly repayments, and the interest rate was 6 per cent. Over 10 years, they’d make repayments to pay off the $100,000, plus the 6 per cent interest. In other words, they’d pay $1000 per month for the loan, plus around $110.00 in interest. Over the life of the loan, that’s just over $33,000 in interest.

How do interest rates affect your savings and super?

While you have to pay back interest on loans, you actually get paid interest on your super and savings (in a high interest account). That means, all other things being equal, the more you save, the more you may be rewarded with interest. It’s important to keep in mind you may pay fees too, especially on super, so it’s worth adding those to any calculations.

Over time, interest ‘compounds’. That means you get paid interest on top of both the principal amount and the existing interest: interest on top of interest. It’s one of the reasons it can be a good idea to put money into super early if possible – it has more time to grow and earn more money for retirement.

Can you get a ‘no interest’ loan?

If you’re suffering financial hardship, you may be able to get a ‘no interest’ loan from Good Shepherd. These loans are provided for essential goods and services. You can read more here.

Like every article on this website, this is not personal financial advice.