Investigating the Impact of Interest Rates on Savings and Borrowing

The Concept of Interest Rates

Interest Rate is the amount charged by a lender to a borrower for the use of assets, expressed as a percentage of the principal.
Interests can be earned (when you save or invest) or paid (when you borrow).
There are two main types of interest rates: simple and compound. Simple Interest is calculated on the original amount of money, while Compound Interest is calculated on the initial amount and also on the accumulated interest of previous periods.

When you save money in a savings account or invest it, you earn interest. The higher the interest rate, the more money you will earn.
Typically, banks and financial institutions pay compound interest on savings. This means the interest you earn each period is added to your principal, so, you earn interest on interest.
The formula for compound interest includes the principal amount, interest rate, number of times interest applied per time period, and number of time periods.
An increase in any of these variables would increase the total interest earned on your savings.
It is always beneficial to start saving early, even if the amount is small. The impact of compound interest over time can lead to significant sums.

Conversely, when you borrow money you have to pay back the amount you borrowed, the principal, plus interest.
The interest rate determines how much extra you have to pay back on top of the amount you borrowed.
If you borrow money at a high-interest rate, you’ll end up paying back much more than you borrowed. Conversely, a lower interest rate will mean you pay back less.
The formula for calculating simple interest includes the loan amount, interest rate, and the length of time the money is borrowed for.
The longer you take to repay the loan, and the higher the interest rate, the more interest you will end up paying.

Understanding interest rates is crucial for making informed financial decisions.
As a saver or an investor, you want to look for ways to earn higher interest. But if you are borrowing, you want to aim for lower interest rates.
It’s important to understand how to calculate both simple and compound interest, and how changing those rates or the amount of time impact your saving or borrowing costs.
Finally, remember to always compare interest rates from different banks or financial institutions before making a decision. This can have a significant impact on the amount of money you end up gaining or owing.