What is 'Interest Rate'
Interest rate is the amount charged, expressed as a percentage of principal, by a lender to a borrower for the use of assets. Interest rates are typically noted on an annual basis, known as the annual percentage rate (APR). The assets borrowed could include, cash, consumer goods, large assets, such as a vehicle or building. Interest is essentially a rental, or leasing charge to the borrower, for the asset's use. In the case of a large asset, like a vehicle or building, the interest rate is sometimes known as the "lease rate". When the borrower is a lowrisk party, they will usually be charged a low interest rate; if the borrower is considered high risk, the interest rate that they are charged will be higher.
BREAKING DOWN 'Interest Rate'
Interest is charged by lenders as compensation for the loss of the asset's use. In the case of lending money, the lender could have invested the funds instead of lending them out. With lending a large asset, the lender may have been able to generate income from the asset should they have decided to use it themselves.
Using the simple interest formula:
Simple Interest = P (principal) x I (annual interest rate) x N (years)
Borrowing $1,000 at a 6% annual interest rate for 8 months means that you would owe $40 in interest (1000 x 6% x 8/12).
Using the compound interest formula:
Compound Interest = P (principal) x [ ( 1 + I(interest rate) ^{N} (months) )  1 ]
Borrowing $1,000 at a 6% annual interest rate for 8 months means that you would owe $40.70.
The interest owed when compounding is taken into consideration is higher, because interest has been charged monthly on the principal + accrued interest from the previous months. For shorter time frames, the calculation of interest will be similar for both methods. As the lending time increases, though, the disparity between the two types of interest calculations grows.

Interest
The charge for the privilege of borrowing money, typically expressed ... 
Periodic Interest Rate
The interest rate charged on a loan or realized on an investment ... 
AddOn Interest
A method of calculating interest whereby the interest payable ... 
Compound Interest
Compound Interest is interest calculated on the initial principal ... 
Compounding
The ability of an asset to generate earnings, which are then ... 
Continuous Compounding
The process of earning interest on top of interest. The interest ...

Managing Wealth
Dissecting the Simple Interest Formula
Simple interest ignores the effect of compounding: it's only calculated on the principal amount. This makes it easier to calculate than compound interest. 
Investing
Explaining Interest
Interest is the price charged to borrow money, and is typically expressed as a percentage of the principal, or the amount loaned. 
Investing
Forces Behind Interest Rates
Interest is a cost for one party, and income for another. Regardless of the perspective, interest rates are always changing. 
Investing
4 Ways Simple Interest Is Used In Real Life
Simple interest works in your favor when you're a borrower, but against you when you're an investor. 
Investing
Learn Simple and Compound Interest
Interest is defined as the cost of borrowing money, and depending on how it is calculated, it can be classified as simple interest or compound interest. 
Personal Finance
Simple Interest Loans: Do They Exist?
Yes, they do. Here is what they are â€“ and how to use them to your advantage. 
Insights
Simple Interest
Simple interest is a quick method of calculating the interest charged on a loan. Simple interest is determined by multiplying the interest rate by the principal by the number of periods. 
Investing
The Effective Annual Interest Rate
The effective annual interest rate is a way of restating the annual interest rate so that it takes into account the effects of compounding. 
Investing
Calculating Future Value
Future value is the value of an asset or cash at a specified date in the future that is equivalent in value to a specified sum today. 
Investing
The Interest Rates: APR, APY And EAR
When most people shop for financial products, all they focus on is the listed interest rate. Human eyes instinctively dismiss the fine print, which usually includes the terms APR (annual percentage ...

What is the difference between compounding interest and simple interest?
Simple interest is calculated by multiplying the principal amount by the interest rate and the number of periods in a loan. ... Read Answer >> 
What formula can I use to calculate interest on interest?
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What are some examples of simple interest loans?
Learn about two common examples of simple interest loans. Understand what simple interest is and learn why it's important ... Read Answer >> 
Are APRs different in different countries?
Learn about the term APR and how it is used in the United States and other countries. Explore why different lenders charge ... Read Answer >> 
How do I calculate compound interest using Excel?
Learn what compound interest is, the formula used to calculate it, and how to calculate it using three different techniques ... Read Answer >> 
What is the rationale behind the effective interest rate?
Read about the reasons why market actors identify the effective interest rate as it pertains to investing, lending and accounting. Read Answer >>