Finance
What is An interest rate?
An interest rate is the cost of borrowing money, or the reward for saving it, expressed as a percentage. It sets how much extra a borrower repays and how much a saver earns over time.
See it, don’t just read it.
Watch a 2-minute lesson with voice + animation that explains an interest rate.
Key things to understand
- 1For borrowers it's the price of a loan; for savers it's the return on deposits.
- 2Central banks set a benchmark rate to steer the whole economy.
- 3Higher rates slow borrowing and spending (cooling inflation); lower rates encourage them.
- 4Rates compound, so they hugely affect long-term loans like mortgages and long-term savings.
Frequently asked questions
- Why do central banks change interest rates?
- To manage the economy — raising rates to cool inflation, or lowering them to encourage borrowing and growth.
- How do interest rates affect me?
- They change the cost of loans (mortgages, credit cards) and the return you earn on savings.
- How is an interest rate related to compound interest?
- The interest rate is the percentage; compound interest is what happens when that rate is applied to your balance plus previously earned interest.