Interest rates can affect businesses in a number of ways, whether you are borrowing money or saving it. Before finding out how they could impact your business, it’s important to understand the terms associated with interest rates.
Interest rate is essentially a percentage a bank or loan lender charges on the total amount you either borrow or save.
If you’re saving money in an account, the interest fee is paid to you as the bank is essentially paying to borrow your money.
If you borrow money from a bank or a loan lender, the interest rate is the amount you are charged for borrowing that money – which is a percentage of the total amount you borrow. Therefore, you would be paying back the interest rate alongside the original loan sum.
With most loans, there will be additional costs that the bank or lender will charge you, like account or handling fees. The APR (annual percentage rates) is the total percentage of the loan you’ll be paying back, including the annual interest rates and any fees the lender may charge.
It’s important to look at the APR figure when considering a loan as this is the true amount you’ll be paying back.
Loans and credit cards will often use a representative APR when advertising. The representative APR is usually based on personal financial factors, such as your credit rating or income and reflects that at least 51% of the successful applicants will be given the stated APR, while the other 49% may be given a different APR.
For example, if a loan is advertised as being 10% representative APR, this means 51% of accepted applicants have to get 10% as their rate. The other 49% could get a different rate.
To find the best rate available to you, it’s worth getting a quote before you apply to see what the lender is able to offer you.
A fixed interest rate means that your interest rate will not change over the repayment term.
A variable rate means the interest rate can increase or decrease each month and you may not know the total amount you’ll pay back before taking the loan out.
Some lenders and banks may also provide a combination of fixed and variable interest rates, which are commonly associated with credit cards and mortgages. For example, a mortgage may offer a fixed interest rate for two years and then after this period, a variable rate until the mortgage term has ended.
When borrowing money, interest rates could affect a business in two ways.
The first is through your customers; if your customer has debt, they may have less disposable income as they will be paying back additional interest rates on top of the value of the loan each month and your sales could be impacted by this.
The second is by making your overall outgoings increase due to higher interest rates. This would mean that your business is left with less money and profit.