An interest rate is the percentage charged by a lender to a borrower for the use of money, typically expressed as an annual percentage of the loan amount. Interest rates are a fundamental component of the financial system, influencing everything from consumer loans, mortgages, and credit cards to corporate borrowing and government debt. The interest rate reflects the cost of borrowing money and compensates the lender for the risk of lending, the time value of money, and inflation. Interest rates can be fixed, remaining constant over the life of the loan, or variable, fluctuating based on changes in the broader economy or financial markets.

Interest rates are determined by various factors, including the central bank's monetary policy, inflation expectations, the creditworthiness of the borrower, and market conditions. Central banks, such as the Federal Reserve, play a key role in setting short-term interest rates through monetary policy tools like the federal funds rate. These rates, in turn, influence a wide range of interest rates in the economy, including those on mortgages, car loans, and savings accounts. When central banks raise interest rates, borrowing becomes more expensive, which can slow economic growth, while lower interest rates can stimulate borrowing and spending.

The impact of interest rates extends to both borrowers and savers. For borrowers, higher interest rates increase the cost of loans, making it more expensive to finance major purchases like homes, cars, and education. This can lead to reduced consumer spending and slower economic growth. On the other hand, savers benefit from higher interest rates, as they earn more on their deposits and fixed-income investments. However, low-interest rates can erode the returns on savings, prompting investors to seek higher-yielding, but riskier, investments. Understanding how interest rates affect borrowing, saving, and investment decisions is crucial for managing personal finances and achieving financial goals.