What is an interest rate?

An interest rate represents the cost of borrowing money or the return on investments expressed as a percentage. This financial concept is crucial in various transactions, especially in loans, savings accounts, and other financial products. When an individual or a business borrows funds, the interest rate determines how much extra they will have to pay back on top of the principal amount. Conversely, for savings and investments, it indicates the earnings you can expect from keeping your money in a bank or other financial instruments. For instance, if a bank offers a savings account with an interest rate of 2%, it means that for every $100 deposited, the account holder would earn $2 in interest over the specified period, usually annually. Understanding how interest rates work is vital for making informed decisions in both personal and business finance.