Interest rate definition

An interest rate is the percentage charged for borrowing money or paid for lending, saving, or investing it. It sets how much interest builds up on a sum over a given period, usually quoted per year.

An interest rate can be fixed, staying the same for the agreed term, or variable, moving with market conditions or a benchmark. Applied to a principal amount, the rate determines the interest a borrower pays or a saver receives. Higher rates make borrowing more expensive and saving more rewarding, and lower rates do the reverse.

An interest rate on a specific loan or account is not the same as the base rate, the benchmark a central bank sets to steer the economy. Lenders price their own rates above or below the base rate, so when a central bank moves it, the rates on mortgages, loans, and savings tend to follow. Interest rates also feed through to bond prices, currency values, and stock market sentiment.

Interest rate Example

You take out a USD 10,000 loan at a 5% annual interest rate.

The yearly interest cost is:

USD 10,000 √ó 5% = USD 500

You pay USD 500 in interest for one year, before any fees, compounding, or repayment terms apply.