general
Interest Rate
An interest rate is the percentage of the principal charged by a lender to a borrower for the use of money, or paid by a bank on deposited funds. It is quoted as an annual percentage.
Central banks set benchmark interest rates (Federal Funds Rate, Bank of England Base Rate) that influence all other rates in the economy. When central bank rates rise, mortgage rates, car loan rates, and savings rates all tend to rise.
On loans: higher interest rate = higher monthly payment = more total interest paid. On savings: higher rate = faster growth. This is why understanding interest rates matters for both borrowing and investing decisions.
Related terms
- Annual Percentage Rate (APR)
- APR is the annual cost of borrowing, expressed as a percentage. Unlike an interest rate, APR includes fees and other costs, making it the better figure for comparing loan offers.
- Compound Interest
- Compound interest is interest calculated on both the initial principal and the accumulated interest from previous periods. It causes savings and investments to grow exponentially over time.
- Mortgage Payment
- A mortgage payment is the fixed monthly amount owed to a lender, covering principal and interest (P&I). It may also include escrow for property tax and homeowners insurance (PITI).
Frequently asked questions
What is Interest Rate?
An interest rate is the percentage of the principal charged by a lender to a borrower for the use of money, or paid by a bank on deposited funds. It is quoted as an annual percentage.