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What are interest rates?

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Quick answer

An interest rate is the cost of borrowing money — or the reward for saving it — expressed as a percentage. It's how much extra a borrower pays a lender over time, and it shapes everything from loans to the wider economy.

Key things to understand

For borrowers, it's the price of a loan; for savers, it's the return on deposits.
It's usually quoted as an annual percentage of the amount borrowed or saved.
Central banks set key rates that ripple through mortgages, loans, and savings.
Higher rates make borrowing costlier and saving more rewarding, slowing spending.
Lower rates encourage borrowing and spending, stimulating the economy.

People also ask

Who sets interest rates?

Central banks set benchmark rates that influence the whole economy; individual lenders then set their own rates for loans and savings based on those and on risk.

Why do interest rates change?

Central banks adjust them to manage the economy — raising rates to cool inflation, or lowering them to encourage borrowing and growth.

What's the difference between an interest rate and APR?

The interest rate is the basic cost of borrowing; APR (annual percentage rate) also includes certain fees, so it reflects the fuller cost of a loan.

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.

Part of the guide: Money Basics: Save, Borrow & Invest →