Glossary > Finance > Banking > General

Interest Rate

Interest rate is the cost of borrowing money, expressed as a percentage of the loan amount. It is the amount charged by a lender to a borrower for the use of assets such as cash or credit.

Example #1

For example, if you borrow $1,000 from a bank at an interest rate of 5%, you will need to pay back the $1,000 plus an additional $50 (5% of $1,000) as interest.

Example #2

Another example is when you deposit money in a savings account, the bank pays you an interest rate for keeping your money with them.

Misuse

Misuse of interest rates can occur when lenders impose exorbitant rates on loans, taking advantage of consumers in vulnerable financial situations. This practice can lead to a cycle of debt for borrowers who struggle to repay high-interest loans, resulting in financial instability.

Benefits

One of the benefits of interest rates is that they allow individuals and businesses to access funds they need through borrowing. Additionally, interest rates incentivize saving by offering returns on deposited funds, encouraging responsible financial behavior.

Conclusion

Interest rates play a crucial role in the financial ecosystem, facilitating lending and borrowing activities while promoting saving. As consumers and employees, understanding interest rates can help individuals make informed decisions when taking out loans or managing their savings.

Related Terms

LoanDepositCredit ScoreSavings Account