What is meant by 'interest rate'?

The term 'interest rate' specifically refers to the percentage charged by lenders on borrowed money or paid by banks on invested funds. This percentage is a way to express the cost of borrowing or the return on investment for savings and other financial products. The interest rate determines how much extra money one must pay back on a loan or how much one earns on deposited funds over a period of time, making it a fundamental concept in personal finance and economics.

For instance, when you take out a loan, the lender charges an interest rate that adds to the principal amount borrowed, which is why understanding this rate is crucial in financial planning. Similarly, when one invests money, banks or financial institutions may offer a percentage as interest on savings accounts or other investment vehicles, which incentivizes saving and investing. Thus, this definition captures the core essence of what an interest rate is and its significant role in financial transactions.