Interest Rate

What is an Interest Rate?

An interest rate is the percentage charged on a loan or paid on an investment, representing the cost of borrowing or the reward for saving. It is calculated as a proportion of the principal (the original amount borrowed or invested). Interest rates can be fixed, remaining the same over time, or variable, changing based on market conditions.

Types of Interest Rates

• Fixed Interest Rate: Remains constant over the term of the loan or investment.
• Variable Interest Rate: Fluctuates according to changes in a benchmark interest rate or market conditions.
• Compound Interest: Interest calculated on both the principal and the accumulated interest over previous periods.

Factors Influencing Interest Rates

• Inflation: Higher inflation rates often lead to higher interest rates.
• Central Bank Policies: Policies set by central banks, such as the Federal Reserve, can impact rates.
• Credit Risk: Borrowers with higher credit risk may face higher interest rates.

Related Terms and Concepts

Loan, principal, annual percentage rate (APR), creditworthiness.