Interest Rate
The percentage charged for borrowing money or paid for depositing it, quoted as an annual figure.
What Interest Rate means
An interest rate is the price of money. As a borrower you pay it; as a depositor or bondholder you receive it.
A fixed rate stays the same for the life of the loan, making payments predictable. A variable or adjustable rate moves with a benchmark, so payments can rise — the central risk in adjustable-rate mortgages and the reason credit card rates climb when the Federal Reserve tightens.
The stated rate is not the whole cost of a loan. APR adds required fees; APY adds the effect of compounding on savings. Comparing a rate against an APR is not a like-for-like comparison.
Rates are set against a backdrop of Federal Reserve policy, inflation expectations, loan term, and your own credit risk — which is why two borrowers are quoted different rates on the same product on the same day.
Related terms
APR (Annual Percentage Rate)
The yearly cost of borrowing, expressed as a percentage that includes the interest rate plus most lender fees.
APY (Annual Percentage Yield)
The yearly return on savings including the effect of compounding, which makes it the honest number for comparing deposit accounts.
Compound Interest
Interest earned on both your original money and the interest already added to it, which makes balances grow faster over time.
Amortization
The process of paying off a loan through fixed regular payments, where each payment covers interest first and the rest reduces the balance.
Inflation
The general rise in prices over time, which steadily reduces what each dollar of savings can buy.
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