What is interest rate?

Interest rate is the amount charged by lenders to borrowers for the use of money, expressed as a percentage of the principal, or original amount borrowed; it can also be described alternatively as the cost to borrow money.

Why is interest a cost of money?

Interest is essentially a charge to the borrower for the use of an asset. Assets borrowed can include cash, consumer goods, vehicles, and property. Because of this, an interest rate can be thought of as the "cost of money" - higher interest rates make borrowing the same amount of money more expensive.

How does interest rate affect a loan?

For loans, the interest rate is applied to the principal, which is the amount of the loan. The interest rate is the cost of debt for the borrower and the rate of return for the lender. The money to be repaid is usually more than the borrowed amount since lenders require compensation for the loss of use of the money during the loan period.

What is an example of a 8% interest rate?

For instance, an 8% interest rate for borrowing $100 a year will obligate a person to pay $108 at year-end. As can be seen in this brief example, the interest rate directly affects the total interest paid on any loan.