Wondering what interest rates actually are, do, and how they work? That’s why we’ve written the article below for you!
1. Why are there interest rates?
Let's dig a bit deeper into why you need interest rates. There are many different kinds of interest rates out there:
- Interest rates on a savings account
- Interest rates on a credit card
- Interest rates on a student loan or mortgage
- Interest rates on a car loan
Each of these interest rates will be different depending on the circumstance. If inflation is high, interest rates can be increased to reduce inflation back to normal. Conversely, if inflation is low, then interest rates are kept low so that the value of money doesn't drop too much.
All you need to know here is that there are many different kinds of interest rates available for various reasons. For example, credit card interest rates exist so that you can borrow money from the bank to buy those Yeezys you want, and they charge you for that privilege. The same applies to car loans, student loans, and mortgages.
On the other hand, when you leave money in a savings account, the bank will pay you interest because they get to use the funds available in your account for investments and other profitable ventures.
2. Simple interest vs compound interest
There are two other ways interest rates get categorized. Let's go into detail with each below.
Simple Interest
This kind of interest is calculated only on the principal amount of the loan or deposit. For example, if you earn €3 on a €100 savings account, you will earn interest only on the €100 next month.
Compound Interest
In this situation, the interest gets calculated not only on your principal amount but also on the interest you receive every period. For example, if you earned €3 on a €100 savings account this month, then next month, your interest will be calculated not only on the €100 but also on the €3. That is, it will be calculated on the total amount of €103.
Compound interest helps you grow your money faster and boosts your return on investment. That is why many call it the "eighth wonder of the world."
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3. Can you opt-out of receiving interest?
Interestingly enough, many banks or accounts will not allow you to opt-out of receiving interest. It's odd since it should be your prerogative if you wish to receive interest or not on your money.
bunq thinks it’s your money, your rules - so you can always opt-out of receiving interest, on any of your accounts.
4. Interest rates change for many reasons
There are many reasons that interest rates change over time. The first one mentioned already is inflation changes. That can affect interest rates positively or negatively depending on how the tide turns.
Also, if you’re late on paying back your loans or mortgage, or if your credit rating suddenly drops, that could result in an increase in your interest rate, as you are becoming more of a liability for lenders.
Banks and other financial institutions can also decide whether they’ll increase or decrease interest rates, depending on economic conditions and financial factors.
Did you also know that there are negative interest rates? To encourage spending and loaning, some financial institutions will charge people for the cash deposited in their accounts rather than pay them interest.
5. Your credit card comes with many different interest rates
If you own one, your credit card doesn't just have one interest rate you need to be aware of. All the items listed below come with their different interest rates:
- Cash Advances
- Balance transfers
- Purchases
That's why you need to be careful when using a credit card - they can gauge you if you use it without discernment.
6. You can negotiate interest rates on a loan
If you have a good credit history and have established a great working relationship with your financial institution, sometimes you can negotiate interest rates. You could end up with a lower interest rate because you proved to them that you are financially capable and trustworthy.
Therefore, it's always better to negotiate and ask for a lower rate. You never know when you might end up receiving such a bounty. And with a lower interest rate, you can end up paying hundreds of dollars less over the lifetime of the loan.
7. At bunq, you get a high interest rate on savings account
With a bunq Savings Account, you earn a massive 1.56%* on your deposits, effortlessly. If you’re looking for high interest for your savings only, you can enjoy our Easy Savings plan, for free! All you need is a phone number to get started.
Get the best of both worlds with bunq
Now you don't have to choose between a low-risk, low-interest savings account or a high-risk, high-stakes investment option. Sign up for our Easy Savings plan in just five minutes and get high interest rates on your savings. Try it now: no strings attached.
* MassInterest is 1.05% for businesses.
