What are interest rates?

Interest rates are defined as the cost of borrowing money or the return on savings, expressed as a percentage. When someone borrows money, the lender charges interest as compensation for the risk of lending and the opportunity cost of not using that money elsewhere. Conversely, when an individual deposits money in a savings account, they earn interest as a reward for allowing the bank to use their funds for lending and investment purposes. This rate is typically expressed as a percentage of the total amount borrowed or saved over a specific time period, often annually.

This understanding is fundamental in both personal finance and economics, as interest rates influence consumer behavior, savings rates, and overall economic activity. The interaction between borrowing costs and savings returns affects financial decisions, such as whether to take out loans for homes or education or how much to deposit in savings accounts.