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2.3b Interest Rates

Interest Rates

Interest is:

Interest is expressed as a percentage.

The Bank of England sets the UK Base Rate based on the performance of the economy. Lenders set their own rates based on this

Borrowing Money

Saving Money

Effects of Interest Rates on Business

Low Interest Rates

  • Cheaper to borrow money
  • Less interest earnt on saved money
  • Businesses may have more money to spend on other parts of the business
  • They may take advantage of low interest rates to borrow more money to grow / improve the business

High Interest Rates

  • More expensive to borrow money
  • More interest earnt on saved money
  • Demand for products and services decreases
  • Higher repayment costs, coupled with reduced sales, may mean companies struggle to pay staff which can lead to an increase in unemployment

Effects of Interest Rates on Consumers

Low Interest Rates

  • Lower repayment amounts on loans, especially mortgages
  • Less interest earnt on saved money
  • Consumers have more money to spend
  • Demand for products and services increases

High Interest Rates

  • Higher repayments on loans, leaving less money to spend on everything else
  • Reduced spending on products and services
  • More interest earnt on saved money

Simple Overview

This is a very over-simplified overview:

High interest rates = less spending
Low interest rates = more spending