interest rate

The usual way of calculating interest — as a percentage of the sum borrowed.



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What does interest rate mean in finance?

Interest rate is the amount that is charged for a loan or purchase made on credit, typically expressed as an annual percentage of the loan or credit balance. The interest rate represents the cost to the borrower for taking out the loan or making a purchase on credit, and is the rate of return for the lender or creditor.

Most loans, mortgages, credit card balances, or purchases made on credit use simple interest, in which the interest rate applies only to the outstanding balance, without adding in or compounding the interest.

For example, if a loan of $1,000 carries an annual interest rate of 10%, then the borrower pays the lender $1,000 x 10% = $100 in interest during each year of the loan. As the balance is paid down, the amount of interest due goes down accordingly.

For credit cards, the interest rate may be stated as an APR (annual percentage rate) to indicate the amount of interest charged if the credit balance were carried for a full year.

Examples of interest rate in a sentence

“An interest rate is the percentage of the principal (total amount of money borrowed) that lenders will charge you to borrow money from them.”
—“What Is A Good Interest Rate?” Rocket Loans.  Retrieved March 15, 2020.

“Fixed interest rate loans lock in an interest rate that remains the same over the entire life of the loan.”
—“What Is A Good Interest Rate?” Rocket Loans.  Retrieved March 15, 2020.

“Since home equity loans are secured, borrowers tend to get a lower interest rate compared with personal loans.”
—“Home Equity Loan Vs. Personal Loan: Which Is Better For You?” Rocket Loans.  Retrieved March 15, 2020.

interest rate vs. APR

Interest rate and APR (annual percentage rate) are terms that are easy to confuse, as they are both annual percentage rates related to how much a loan will cost on top of the principal amount being borrowed.

The interest rate is the advertised rate of interest used in calculating the interest expense on a loan. The interest expense is the remaining balance (or principal) multiplied by the annual rate.

APR includes the interest expense as well as other charges or fees involved in getting the loan.

Example sentences from the Web for interest rate