Interest Rate
The percentage charged on borrowed money or earned on deposited/invested money, expressed as an annual rate.
Interest rates are the price of money — borrowers pay it, savers and investors earn it. Central banks set a base rate that influences all other rates in the economy. When the central bank raises rates, savings accounts pay more but loans become more expensive. Fixed rates stay constant throughout the loan term, providing predictability. Variable (floating) rates change with market conditions, offering lower initial rates but uncertainty. Understanding interest rates is crucial for every financial decision: choosing between fixed and variable mortgages, selecting savings accounts, evaluating bond investments, and managing credit card debt.
Example
A savings account paying 4.5% annual interest on $10,000 earns $450/year. A credit card charging 22% interest on a $5,000 balance costs $1,100/year if unpaid.
Related terms
APR (Annual Percentage Rate)
The annualized cost of borrowing expressed as a percentage, including interest and mandatory fees, used to compare loan products.
Compound Interest
Interest earned on both the initial principal and the accumulated interest from previous periods, creating exponential growth over time.
Mortgage
A long-term loan secured by real property, used to finance the purchase of a home or investment property, typically repaid over 15–30 years.
Inflation
The rate at which the general price level of goods and services rises over time, reducing the purchasing power of money.