What does interest mean?

The word ‘interest’ refers to the fee that a lender charges you for borrowing money.

Normally, the interest you’re charged will be a percentage of the money you owe and will be communicated to you as an annual percentage rate (APR). For example, if you’re taking out a loan with a 12% APR, this means that over the course of a year, you’ll be charged 12% of the amount you owe in interest or other fees.

Interest rates usually go up and down roughly in line with the base rate (that’s what we call the Bank of England’s official borrowing rate). That said, some mortgages and other kinds of loans have a fixed-rate period, which is where the interest you have to pay is fixed at a set price for a set period of time.

Nuts About Money tip

Mortgages and other kinds of loans tend to have lower interest rates than credit cards and arranged overdrafts. If you have lots of debts in different places, you could make them more manageable (and potentially save money) by taking out one single loan to cover them all instead.

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