The cost of borrowing money or the return on savings, expressed as a percentage.
An interest rate is the cost of borrowing money (or the return on lending/saving), expressed as a percentage of the amount borrowed annually. Interest rates are set by market forces (supply and demand for credit) and heavily influenced by central banks like the Federal Reserve. Higher interest rates make borrowing more expensive and encourage saving; lower rates do the opposite. Interest rates vary based on credit risk (lower rates for creditworthy borrowers), loan term (shorter terms often have lower rates), and economic conditions. Understanding interest rates is critical: they affect mortgage payments, auto loan costs, credit card interest, and savings account returns. Small changes in interest rates have enormous impacts on your financial situation over time.