Definition
An interest rate is usually expressed as a percentage of the amount borrowed or saved over a period of time.
Political Dictionary
Interest Rates
Interest rates are the cost of borrowing money or the return paid to lenders.
Why It Matters
Rates affect mortgages, credit cards, business investment, government borrowing, savings, and inflation.
How It Works
Lenders price loans based on policy rates, market conditions, duration, risk, and expected inflation.
History
Interest has existed for centuries, while modern rates are shaped by markets, central banks, inflation expectations, and credit risk.
Example
A higher mortgage rate increases the monthly cost of buying a home.
Common Misconceptions
- The Federal Reserve directly fixes every interest rate.
- Lower rates always benefit everyone.
- Nominal and real interest rates are the same.
Related Terms
- Fiscal Policy
- Monetary Policy
- Inflation
- Economic Growth
- Government Spending
Related Topics
See Also