interest rate
An interest rate is the price of money, shown as a percentage, whether you are the one lending it or the one borrowing it.
In plain English
Money has a price, exactly like rice or fuel. The interest rate is that price.
When you borrow, the rate is what you pay for the use of somebody else's money. When you save or invest, the rate is what you are paid for letting somebody else use yours. Same number, opposite sides of the table.
In Nigeria the gap between those two sides is enormous, and it is worth staring at. A bank may pay you 4 percent on a savings account and lend that same money out at 28 percent. You are financing somebody else's business and being paid almost nothing for it.
Which is why the single most important habit is comparison. Never accept a rate because it was the one you were offered. Compare what a bank pays you against what a treasury bill or money market fund pays. Compare what a lender charges against what another lender charges.
And always place the rate next to inflation. Earning 8 percent while prices rise 25 percent is not earning. It is losing more slowly than the person who did nothing.
You keep ₦1 million in a savings account paying 4 percent, earning ₦40,000 a year. The same ₦1 million in a money market fund paying 18 percent earns ₦180,000. The money did not work harder. You simply asked for a better price.
Questions people ask
What is a good interest rate in Nigeria?
It depends whether you are lending or borrowing. As a saver, compare against treasury bills, which are the safest naira return available. As a borrower, compare at least three lenders before signing.
Why do banks pay savers so little?
Because they can. Most people never move their money, so there is little pressure on banks to compete for it. Moving your savings is often the highest paid ten minutes of your year.
What is the difference between fixed and variable rates?
A fixed rate stays the same for an agreed period. A variable rate moves with the market, which means your repayments can rise without warning.
Last reviewed