Interest rates can change how people and businesses borrow and lend money. This has a big effect on the economy. Interest rates are the cost you pay to borrow money and the money you earn on your savings. Central banks, like the Bank of England, change these rates to help control how money is used in the economy.
Cost of Loans: When interest rates go up, it costs more to borrow money. For example, if a bank charges 4% interest on a home loan of £200,000, you would pay £8,000 each year in interest. But if the rate goes up to 6%, that yearly payment jumps to £12,000. This makes loans more expensive for people.
Consumer Spending: Higher interest rates can make people less likely to borrow money. In 2022, the Bank of England raised rates from 0.1% to 1.75% to fight rising prices (inflation). Because of this, the number of people taking out loans dropped by 7%. Many didn’t want to borrow for big purchases like houses or cars.
Business Investment: Businesses also borrow money to grow and operate. When interest rates rise, businesses often spend less on new projects. For example, a 1% hike in rates can lead to about £1.4 billion less in spending from companies as they put off making big investments.
Bank Income: Higher interest rates can help banks earn more money from their loans. If a bank raises its lending rate from 3% to 5%, it makes more profit. For instance, on £1 million in loans, this can mean an extra £20,000 each year for the bank to use for lending more.
Loan Approval: When interest rates rise, banks become more careful about who they lend money to. They might make it harder to get a loan. Recent reports show that when interest rates go up by 10%, the number of loans that are denied also goes up by 15% because banks set stricter rules.
Encouraging Savings: Higher interest rates can also make people want to save more money. In a 2022 survey, 60% of people said they were likelier to put money into savings accounts when rates were over 4%. This means banks have more money to lend to other qualified borrowers.
To sum it up, changes in interest rates really matter for how borrowing and lending work. Higher interest rates usually mean less borrowing and spending for both people and businesses. At the same time, banks can make more money. Lower interest rates encourage borrowing but can cut into banks' profits. Understanding how this all fits together can help us see the health of the economy and how financial markets operate.
Interest rates can change how people and businesses borrow and lend money. This has a big effect on the economy. Interest rates are the cost you pay to borrow money and the money you earn on your savings. Central banks, like the Bank of England, change these rates to help control how money is used in the economy.
Cost of Loans: When interest rates go up, it costs more to borrow money. For example, if a bank charges 4% interest on a home loan of £200,000, you would pay £8,000 each year in interest. But if the rate goes up to 6%, that yearly payment jumps to £12,000. This makes loans more expensive for people.
Consumer Spending: Higher interest rates can make people less likely to borrow money. In 2022, the Bank of England raised rates from 0.1% to 1.75% to fight rising prices (inflation). Because of this, the number of people taking out loans dropped by 7%. Many didn’t want to borrow for big purchases like houses or cars.
Business Investment: Businesses also borrow money to grow and operate. When interest rates rise, businesses often spend less on new projects. For example, a 1% hike in rates can lead to about £1.4 billion less in spending from companies as they put off making big investments.
Bank Income: Higher interest rates can help banks earn more money from their loans. If a bank raises its lending rate from 3% to 5%, it makes more profit. For instance, on £1 million in loans, this can mean an extra £20,000 each year for the bank to use for lending more.
Loan Approval: When interest rates rise, banks become more careful about who they lend money to. They might make it harder to get a loan. Recent reports show that when interest rates go up by 10%, the number of loans that are denied also goes up by 15% because banks set stricter rules.
Encouraging Savings: Higher interest rates can also make people want to save more money. In a 2022 survey, 60% of people said they were likelier to put money into savings accounts when rates were over 4%. This means banks have more money to lend to other qualified borrowers.
To sum it up, changes in interest rates really matter for how borrowing and lending work. Higher interest rates usually mean less borrowing and spending for both people and businesses. At the same time, banks can make more money. Lower interest rates encourage borrowing but can cut into banks' profits. Understanding how this all fits together can help us see the health of the economy and how financial markets operate.