Interest Rate
The percentage charged by a lender or paid by a borrower for the use of money over a period of time.
Definition
An interest rate is the amount a lender charges a borrower for the use of assets, expressed as a percentage of the principal. Interest rates are set by central banks (like the Federal Reserve) and influence the entire economy. When rates are low, borrowing is cheap, encouraging spending and investment. When rates are high, borrowing is expensive, slowing economic activity. Interest rates affect mortgages, car loans, credit cards, savings accounts, and bond yields. The real interest rate equals the nominal rate minus inflation. Interest rates are one of the most powerful tools in monetary policy and directly impact stock valuations, housing markets, and currency values.
Related Terms
Federal Funds Rate
The interest rate at which banks lend reserves to each other overnight, set by the Federal Reserve.
Personal FinanceAnnual Percentage Rate (APR)
The yearly interest rate charged on borrowed money or earned on an investment, including fees.
EconomyInflation
The rate at which the general level of prices for goods and services rises, eroding purchasing power.
InvestingBond
A fixed-income debt instrument where an investor loans money to an entity for a defined period at a fixed interest rate.