Interest Rate

An interest rate turns the cost of borrowing into a simple percentage. If a loan has an interest rate of 8% a year, borrowing 1,000 for a year costs about 80 in interest.

Interest rates vary widely. A government savings product might pay 3%, a mortgage might charge 5%, a car loan 8% and a credit card more than 20%. The differences reflect risk, loan length, whether the loan is secured by an asset and the lender's costs and profit.

Across an economy, interest rates are influenced by the central bank, which sets a key policy rate. When the central bank raises its rate to fight inflation, banks usually raise the rates they charge borrowers and pay savers. When it cuts rates to support the economy, borrowing becomes cheaper.

When comparing interest rates, it helps to check what the rate includes. Some rates include fees and the effect of compounding, while others do not. Terms such as APR and APY exist so that borrowers and savers can compare products on a fair basis.