An interest rate is a measure for the price of money. The provider pays the customer for money put into savings accounts. The customer pays for money borrowed from the provider.
Savings Interest Rates
Quoted as an annual equivalent rate (AER). A larger percentage means that the saver’s money is earning more of a return than a lower percentage.
Example: If you were to deposit £100 in a savings account for one year, at an AER of 2 per cent, you would have £102 in the account at the end of the year. If the AER were to be 5 per cent, you would have £105 in the account at the end of the year.
Inflation means that prices are rising. This means that money put into savings will be losing purchasing power; it will buy less in the future because prices are higher. Ideally, savers want to put their money into savings accounts with interest rates that have a higher percentage than the percentage of inflation.
Borrowing Interest Rates
Quoted as an annual percentage rate (APR).* Except for an overdraft, when it is quoted as an equivalent annual rate (EAR). These rates include some fees and charges, as well as the price for borrowing the money. A larger percentage means that the credit is more expensive for the borrower than a lower percentage.
Example: If you were to borrow £100 for one year at an APR of 9 per cent, you would have to pay back £109 at the end of the year. If the APR were to be 19 per cent, you would have to pay back £119 at the end of the year.
Providers must calculate the AER, APR and EAR interest rates using a formula set by the Office of Fair Trading (OFT). This means that savings rates (AER), borrowing rates (APR) and overdraft rates (EAR) can be compared across products on a like-for-like basis.
Borrowing interest rates given in adverts
Adverts for borrowing products sometimes quote a headline interest rate that is lower than the APR. The headline interest rate does not include fees and charges, and so does not give a true idea of the cost of the borrowing. Providers must provide a representative APR when advertising borrowing products. This means that it is the rate that 51 per cent of the people who apply for the loan will get. The other 49 per cent of applicants will pay a different, probably higher, interest rate.
Fixed or variable
Some interest rates are fixed for the term of the saving or borrowing. For example, fixed-rate bonds pay savers a set amount of interest. Personal loan interest rates are usually fixed. This means that the borrower knows the exact amount that they must repay from the beginning. Other interest rates are variable, which means that they can increase or decrease. Most savings accounts have variable interest rates. Credit card and overdraft borrowing is often on a variable basis.
Providers use the rate set by the Bank of England, known as Bank Rate, as a base from which to work out how much their savings and borrowing interest rates will be.
People’s choices and aspirations are influenced by their values, beliefs and attitudes, even if they are not aware of it. Personal values, such as ethics and attitudes to risk, affect financial choices. For example, they affect how you choose to deal with your money and what you are prepared to invest it in.
These are generalised feelings about desirable behaviour or goals. They involve the concepts of ‘good’ and ‘bad’, and how things ought to be. There are different types of value that have varying importance for different individuals and cultural groups. These values are social, economic, moral, religious and cultural, and personal.
These are the ways in which we think things are. They are more specific and detailed than values. They are absolute (eg ‘It is acceptable to do X, but not Y’),or causal (eg ‘If I do X, then Y may happen’).
Our attitudes are how we are disposed towards things. They are general feelings or evaluations. Attitudes may be changed by circumstance, events, experience or advice. Attitudes towards something can be positive, negative or neutral.
This refers to the phenomenon that what we expect to happen often does happen because our attitudes affect how we behave and how we behave affects what happens. Our expectations are often self-fulfilling.
Perceptions are the way in which things appear to us. They are the way in which we interpret what we observe and sense consciously or unconsiously. Each person's perceptions are shaped by the values, bekiefs, etc, that they have as an individual.
Objective and subjective analysis
People make decisions based on objective analysis (looking at the facts only) or subjective analysis (using their perceptions, values, attitudes, etc). Objective analysis tends to be influenced by subjective factors even if we are unaware of it. This is because of selective attention (that is, tuning out some information) and selective distortion (that is, interpreting information according to our values, etc, such as when we stereotype people or situations).
This means assuming that certain groups of people automatically share the same characteristics because they belong to that group.
External influences on values etc.
The strongest influences are from our culture, the society in which we live (including the media) and our peers (people like us). The messages that we receive can be direct, also known as ‘overt’ or ‘explicit’; they can alternatively be indirect, also known as ‘covert’ or ‘implicit’. How we want other people to perceive us also influences our behaviour and decisions, for example through imitating, identifying with and complying with others.
These are standards of personal conduct that guide our decisions and behaviour. They are based on core values and refer to what we think is ‘right’ or ‘wrong’.
Organisations have values too
Organisations express their values through their marketing, their corporate responsibility strategies (CRSs) and their approaches to ethics, such as offering ethical investment products.