Interest Rate
The percentage charged by a lender on a loan or paid by a bank on deposits, expressed annually.
Definition
An interest rate is the amount a lender charges for the use of assets expressed as a percentage of the principal. It is the cost of borrowing money or the reward for saving it, typically expressed as an annual percentage rate (APR). Interest rates are set by central banks (e.g., the Federal Reserve's federal funds rate) and influence economic activity ”” lower rates stimulate borrowing and spending, while higher rates cool inflation. Fixed rates remain constant; variable rates fluctuate with market conditions.
Example
“A bank offers a mortgage at 6.5% annual interest; on a $300,000 loan, this means roughly $19,500 in interest in the first year before accounting for amortization.”
Usage Examples
- 1
“The Reserve Bank of India raised the interest rate by 50 basis points to combat rising inflation.”
- 2
“As interest rates fell to near zero, investors moved from bonds into equities seeking better returns.”
When & How to Use
Use this term when discussing the cost of borrowing money or the return earned on savings and investments.
- ▸Comparing mortgage rates from multiple lenders before buying a house
- ▸Analysing how central bank rate hikes affect bond prices in a portfolio
- ▸Setting the APR on a new credit product for retail banking customers
Etymology & Origin
From Latin 'interesse' (to be between, to matter) + Old French 'rate' (reckoning). The concept of charging for the use of money dates to ancient Mesopotamia (~2000 BCE).
History & Evolution
Interest rates were codified in the Code of Hammurabi (~1754 BCE), capping grain loans at 33% and silver loans at 20%. Modern central-bank rate-setting emerged after the Bank of England was founded in 1694. The 20th century saw floating rates replace gold-standard fixed rates.
Synonyms
- lending rate
- borrowing rate
- cost of money
- base rate
- policy rate
Images
CC-licensed · free to useVideo
Related Terms
- compound-interest
- apr
- federal-reserve
- inflation