Interest Rate Definition and Legal Meaning

On this page, you'll find the legal definition and meaning of Interest Rate, written in plain English, along with examples of how it is used.

What is Interest Rate?

The amount of a loan that is repaid on top of the loan amount in return for the borrowed money.

History and Meaning of Interest Rate

Interest rates have been in use since ancient times when people started to borrow money from each other. In simple terms, an interest rate is the cost of borrowing money from a lender. It refers to the percentage that the lender charges the borrower for the loaned amount. The concept of interest has evolved over the years and has become a major part of modern economic systems. The central banks of various countries use interest rates to manage inflation, lending rates, and economic growth.

Examples of Interest Rate

  1. A savings account may offer a 2% interest rate, which means that the bank will pay 2% of the total amount deposited as interest annually.

  2. A mortgage loan may have a 5% interest rate, which means that the borrower has to pay an additional 5% of the total loan amount to the lender.

  3. An investor may earn a 7% interest rate on a bond investment, which means that the issuer will pay 7% annually on the bond's face value.

Related Terms

  1. Annual Percentage Rate (APR) - APR refers to the total cost of borrowing money annually, including interest rate and other fees.

  2. Compound Interest - Compound interest refers to the additional interest earned on the principal amount and the accumulated interest over time.

  3. Prime Rate - The prime rate is the interest rate at which banks lend money to their most creditworthy customers.

  4. Fixed Interest Rate - A fixed interest rate is a predetermined interest rate that remains the same during the loan period.

  5. Variable Interest Rate - A variable interest rate is an interest rate that changes periodically during the loan period, based on market fluctuations.