What is an interest rate?

An interest rate is the total percentage paid by the borrower on a loan. It can also be the difference between the money paid back and the money borrowed. The interest rate is what a lender charges a borrower for taking a loan and is also used to determine the rate paid on money deposited in savings accounts.

Increases in interest rates cause borrowers to pay more to lenders, thus increasing their costs for loans. This also affects other industries, especially companies that make luxury goods. When income levels fall, consumers tend to reduce their spending on non-essentials. A decrease in interest rates encourages customers to borrow more because they are not paying high fees for the loans.