Finance
What is Interest rates?
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.
See it, don’t just read it.
Watch a 2-minute lesson with voice + animation that explains interest rates.
Key things to understand
- 1For borrowers, it's the price of a loan; for savers, it's the return on deposits.
- 2It's usually quoted as an annual percentage of the amount borrowed or saved.
- 3Central banks set key rates that ripple through mortgages, loans, and savings.
- 4Higher rates make borrowing costlier and saving more rewarding, slowing spending.
- 5Lower rates encourage borrowing and spending, stimulating the economy.
Frequently asked questions
- 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.