Interest Rate
Definition
An interest rate is the percentage charged by a lender for borrowing money or paid by a bank on savings, expressed as an annual percentage of the principal.
Explanation
Interest rates are the cost of borrowing money. They are determined by the lender based on several factors including the borrower's creditworthiness, loan term, market conditions, and the central bank's benchmark rate.
Higher interest rates mean higher borrowing costs. A 1% difference on a $300,000 mortgage can mean tens of thousands of dollars in additional interest over the loan term. For savings accounts, higher rates mean more earnings on deposits.
Example
A 1% difference on a $300,000 30-year mortgage — 6% vs 7% — increases the monthly payment by about $200 and total interest by over $70,000.