What are interest rates?

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An interest rate is a percentage you are charged on money you borrow, or are paid on the money you save.

You’ll find interest rates advertised on a range of products and services. When it comes to borrowing money, such as a car loan, credit card, personal loan, or a mortgage, the interest rate is the additional percentage you’ll pay back on top of the total loaned amount.

As for savings, such as ISAs and other savings accounts, the interest rate is how much you’ll earn. You will be paid a percentage of the money you have invested.

You’ll sometimes hear the interest rate described as APR or AER, which can add to the confusion. APR stands for annual percentage rate and is usually used to refer to what you pay back (i.e. with a loan). In contrast, AER stands for annual equivalent rate and is typically used for the interest you will be paid on savings.

We’ll explain interest rates and explore what they mean for savings accounts in more detail.

 

How does interest work?

Interest works differently on savings accounts and loans.

For loans, the interest rate will impact how much money you pay back in total. As an example, if you borrow £100 with a 5% interest rate for one year, you’ll pay back £105 to the lender.

For a savings account, the rate reflects how much you earn. So, if you were to save £100 in an account with a 5% annual interest rate, you would have £105 after a year.

These examples of interest rates are for illustrative purposes only. You should always check with your provider to understand your actual interest rate and anything else that may affect the money you pay or are paid (e.g. account fees, withdrawals, etc.).

 

What is the interest on a savings account?

 

The interest rate on a savings account will vary, depending on several factors, including the lender and type of account. For example, you would likely be offered a higher interest rate on a fixed savings account that requires locking your money away for a year than an easy access account with unlimited, no-notice withdrawals.

Interest rates can be variable, which means they can go up or down, or fixed, which means they are set for a certain amount of time.

To find out the interest rate on an existing savings account, you should contact your account provider. If you’re saving with Shawbrook, you’ll find more information in Key Product Information document.

To explore the interest rates Shawbrook is currently offering on new accounts, visit our savings account page.

 

How does savings account interest work?

 

You earn interest on a savings account because the bank (or other financial institution) is technically borrowing the money and paying you interest in return. So, in a similar way to how you would pay back interest on a loan, the bank is paying you interest in exchange for access to your funds. You’ll never notice a bank ‘borrowing’ your money (such as your account balance being temporarily lower), but it happens in the background. That’s why a fixed term account will usually offer a higher interest rate as the bank is guaranteed access to your money for a set period.

You’ll usually see interest rates on savings accounts referred to as AER. This illustrates the interest rate if it was paid and compounded each year. Because it is based on an annual view and considers compound interest (when you earn additional interest on previously earned interest), it is the most accurate interest rate to use for calculating how much you’ll earn and for comparing between different accounts. For more information on how AER is calculated and differs from gross interest rate and APR, visit our AER guide.

 

Interest: key takeaways

 

  • Interest is the money you are charged when borrowing money or are paid when saving (or lending) money.
  • Interest is calculated as a percentage of the total amount borrowed or invested.
  • When you earn interest on previously earned interest, this is known as compound
  • APR is the annual rate of interest you need to pay on loans such as mortgages, personal loans, or credit, while AER is used on savings accounts to show the interest you’ll earn.
  • How much interest you earn will vary depending on the type of savings account and – if applicable – the length of the term. To explore our available accounts and interest rates, visit our savings account page.