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 ... 
Compound Interest
Compound Interest is interest calculated on the initial principal ... 
Interest Rate Ceiling
The maximum interest rate that a financial institution can charge ... 
Legal Rate Of Interest
The highest rate of interest that can be legally charged on any ... 
Marginal Lender
1. A business that will only provide funds to a borrower in exchange ... 
LockedIn Interest Rate
Referring to a loan where the borrower and lender agree on a ...

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
Forces Behind Interest Rates
Interest is a cost for one party, and income for another. Regardless of the perspective, interest rates are always changing. 
Personal Finance
Simple Interest Loans: Do They Exist?
Yes, they do. Here is what they are – and how to use them to your advantage. 
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. 
Insights
How Interest Rates Affect The U.S. Markets
Interest rates can have both positive and negative effects on U.S. stocks, bonds and inflation. 
Investing
Interest Rates Explained: Nominal, Real, Effective
Interest rates are divided into subcategories. Smart investors look beyond the nominal or coupon rate of a bond or loan to see if it fits their objectives. 
Personal Finance
How Interest Rates Work on Savings Accounts
Here's what you need to know to grow your rainyday fund. 
Investing
How Interest Rates Affect Mutual Funds
Find out how changing interest rates impact mutual funds, including bond and money market funds, and how higher rates can discourage investors. 
Financial Advisor
Why Positive Economic Data Pushes the Market Down
Unemployment comes in higher than analysts’ expectations, and the market rallies 1% instead of dropping. GDP growth exceeds expectations slightly, and markets drop. Why could this be happening? 
Trading
Why Are U.S. Companies Borrowing in Euros?
U.S. companies with operations that need funding in Europe are likely to take advantage of lower European borrowing rates.

How can I tell if a loan uses simple or compound interest?
Learn the differences between simple and compound interest and how you can use mathematical calculations and lender disclosures ... Read Answer >> 
What is the difference between compounding interest and simple interest?
Learn about simple interest and compound interest, how to calculate the two types of interest and the main difference between ... Read Answer >> 
What is the difference between yields and interest rates?
The main difference between yields and interest rates is that each term refers to different financial instruments. Yield ... Read Answer >> 
Does inflation favor lenders or borrowers?
Find out under what circumstances inflation benefits borrowers more than lenders and in which situations inflation can be ... Read Answer >>