What is an Interest Rate?

Definition: An interest rate is the amount of money that a borrower pays to a lender for using borrowed money, usually expressed as a percentage of the principal amount.

When someone borrows money, they typically have to pay back more than the amount they borrowed, and the extra amount is called interest. Interest rates are usually expressed as an annual percentage (APR) and can be fixed or variable.

Fixed interest rates remain the same for the duration of the loan or investment, while variable interest rates can change based on market conditions, such as changes in the prime rate or inflation.

Interest rates can also vary depending on the borrower's or issuer's creditworthiness, as lenders will charge higher interest rates to borrowers with a higher risk of defaulting on their loans.

Interest rates play a critical role in the economy, as they affect the cost of borrowing money, the returns on savings and investments, and the overall level of economic activity. Central banks use interest rates to control inflation and stimulate economic growth.