Finance glossary
Interest
Also known as: Interest rate
In simple terms
Interest is the price of using money. When you borrow, it is what you pay the lender on top of what you borrowed; when you save, it is what the bank pays you for keeping your money there.
On this page
What does interest mean?
Interest is a charge for the use of money over time. If you borrow, you pay interest to the lender. If you save or invest cash with a bank, the bank pays interest to you. It is normally quoted as a percentage per year, called the interest rate.
Interest can be fixed (the rate stays the same for a set period) or variable (it can go up or down, often following the Bank of England base rate).
How interest works
Simple interest is worked out only on the original amount. Compound interest is worked out on the original amount plus interest already added — so it grows faster over time. Most savings and many debts compound.
On borrowing, the rate combines with any fees to make up the APR. On savings, the equivalent comparison figure is the AER (Annual Equivalent Rate), which shows the rate as if interest were paid and compounded once a year.
How could this affect me?
A higher rate on borrowing means your debt costs more; a higher rate on savings means your money grows faster. When the Bank of England changes the base rate, variable borrowing and savings rates often move too.
Paying off interest-bearing debt is effectively a guaranteed “return” equal to the interest rate — often more than you could safely earn in savings, which is why clearing expensive debt usually comes before saving.
Things to watch out for
- A headline savings rate may include a temporary bonus that drops off after a year.
- On credit cards, interest is often charged daily and can apply to new purchases if you carry a balance.
- Variable rates can rise — budget for repayments going up, not just down.
General information, not personal advice
Consumer Credit is an independent information service. We do not provide regulated financial advice or sell financial products. For advice on your own situation, speak to an appropriately authorised firm or a free service such as MoneyHelper. About Consumer Credit.
Sources
We checked this page against these official and authoritative sources.
- Bank of England, Interest rates and Bank Rate (opens in a new tab). Accessed 22 Aug 2026.
- MoneyHelper, How interest rates affect you (opens in a new tab). Accessed 22 Aug 2026.