What is Interest and how does it affect us? 

Interest usually happens when a lender charges the borrower extra payment. Interest is the cost of borrowing money or the reward for saving it. When you take out a loan, the lender charges you interest, which is usually a percentage of the amount you borrowed. This means you end up paying back more than you originally borrowed.  

On the other hand, when you save money in a bank, the bank pays you interest on your savings, rewarding you for keeping your money with them. Interest plays a crucial role in the economy by helping people access loans for big purchases, like homes or education, while also encouraging individuals to save for the future. Understanding how interest works is important for making smart financial decisions.  

Pros of Interests 

Savings  

Have you ever considered how interest impacts your savings? Interest is used by banks to encourage people to save money by depositing their money into saving accounts or fixed deposits account. Whenever you put your money in either one of these accounts, you will be promised to get interest from the bank. When the return on high return saving account increases, it will attract people to start depositing their money into these accounts.  

Controlling Inflation 

Second, interest can help in controlling inflation. Usually, inflation starts when consumers have spending power and when the economy is doing well. Meaning they will tend to make more purchases, and some will take loans for big purchases because the interest that is being offered at that time is low. When this thing happens, the amount of demand will exceed the amount of supply. So, when lots of consumers are lining up for limited goods it can lead to a rise in price or inflation.  

To address this situation, central banks typically respond by increasing the interest rates to slow down economic activity. Meaning to say that by increasing the interest rate, consumers now will start to spend less, and the amount of demand will decrease. This helps in stabilizing economic activity. 

Compound Interest 

Finally, it helps investments grow, allowing individuals to build their wealth over time. A good example of this is the Employees Provident Fund (EPF) in Malaysia. When people put money into their EPF accounts, they earn interest on their savings, which helps their retirement funds grow. For instance, if someone saves RM1,000 and the EPF offers a 5% annual interest rate, they will earn RM50 in interest after a year. This compounding effect means they earn interest on both their original savings and the interest they have already earned. Overall, interest is important for encouraging savings and financial growth. 

Cons of Interests 

While interest has its benefits, it also has downsides. One major issue is that high interest rates on loans can lead to significant debt.  

Credit Card Interest 

For example, regular interest payments on high-interest credit cards can strain budgets and make it difficult to save for other important goals. They make money by charging users when they use their credit cards. They also charge other fees and interest.  

The average interest rate for credit card in Malaysia are around 15%-18%. If someone takes out a personal loan for RM5,000 with a high interest rate, they could end up paying back RM7,000 over time. If they struggle to make the monthly payments, they might miss a payment and face additional fees, leading to even more debt. This situation can create a cycle that is hard to escape.  

Personal Loan Interest 

A personal loan is a type of unsecured loan that you can use for various needs, such as weddings, home renovations, or medical expenses. You can obtain these loans from banks, credit unions, or online lenders, making them accessible for many people. 

You can repay personal loans in fixed monthly installments, which makes budgeting easier. Each payment covers both the loan amount and interest, which is the cost of borrowing. The interest rate depends on your credit score, so those with better credit usually pay less. Understanding how much you’ll pay in total can help you make smart borrowing decisions. 

Personal loans provide quick funds, enable debt consolidation, offer flexible use, and help build credit, but they also come with interest costs, risk of additional debt, potential negative impact on credit, and various fees. 

Overall, while interest can help with savings and investments, it can also create serious challenges for borrowers when rates are too high. 

Buy Now Pay Later (BNPL) 

Buy Now Pay Later (BNPL) is a payment option that lets you buy something now and pay for it later without paying upfront. This means you can enjoy your purchase right away while spreading the cost over time. One of the best features of BNPL is that it usually does not charge any interest if you make your payments on time, making it a great choice for managing your budget. However, if you miss a payment, you may incur interest charges, which can add to the cost. So, it’s important to keep track of your payment schedule to avoid these extra fees. Overall, BNPL offers a simple way to shop responsibly without upfront payments 

Financial Alternative 

No Interest Charge with Earned Wage Access (EWA)  

In times of financial crisis or emergency, it's crucial to explore options that are interest-free to avoid accumulating additional debt. Paywatch offers a financial safety net for employees, allowing them to access their earned salary earlier than payday. 

Withdrawals made through Paywatch incur no interest, ensuring compliance with Shariah Law and actively combating riba. Our goal is to provide equitable financial access for all users, empowering them to manage their finances responsibly and effectively. 

Conclusion 

In conclusion, interest has both good and bad sides in personal finance. On the positive side, it encourages people to save, helps them borrow money for important purchases, and allows investments to grow. However, high interest rates can lead to big debts and financial stress. Overall, while interest can create valuable opportunities for saving and stability, it’s important for individuals to understand its potential risks. By being informed, they can make smart choices that help them benefit from interest without getting overwhelmed by it.