What does an interest rate indicate?

An interest rate indicates the percentage paid on loans or earned on deposits, which is a fundamental concept in finance and banking. When you borrow money, the lender charges you an interest rate, which is essentially the cost of borrowing expressed as a percentage of the loan amount. This rate determines how much extra you will pay in addition to repaying the principal amount borrowed.

Conversely, when you deposit money into a savings account or other investment vehicle, the bank pays you interest for allowing them to use your money. This interest is also expressed as a percentage of your deposit.

Understanding interest rates is crucial because they directly affect personal finances, including the cost of loans, mortgages, savings growth, and overall economic behavior. This highlights the importance of being aware of the interest rates associated with various financial products you engage with, as they can significantly impact financial decisions and long-term financial health.