Interest Rate
Definition of 'Interest Rate'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 low-risk 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. |
|
Investopedia explains '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. |
Related Definitions
Articles Of Interest
-
How Interest Rates Affect The Stock Market
Whether you're buying lunch, a home or a stock, you're influenced by interest rates. -
Investing In Credit Card Companies
This investment requires keeping an eye on consumer indexes and the overall health of the economy. -
What Investors Should Know About Interest Rates
Understanding interest rates helps you answer the fundamental question of where to put your money. -
House Price Vs. Interest Rate: Which Is More Important?
Deciding which factor is more important can make a difference in monthly payments, ability to move and Homowners Association fees. -
Dividends, Interest Rates And Their Effect On Stock Options
Learn how analyzing these variables are crucial to knowing when to exercise early. -
How Countries Deal With Debt
For many emerging economies, issuing sovereign debt is the only way to raise funds, but things can go sour quickly. -
How Interest Rates Affect The Housing Market
Learn how rate changes can affect home prices and how you can keep up. -
6 Biggest Bond Risks
Don't assume that you can't lose money in this market - you can. Find out how. -
Prevent Bankruptcy With These Tips
This financial decision should only be used as a last resort. Find out how to avoid it. -
Interest Rates And Your Bond Investments
By understanding the factors that influence interest rates, you can learn to anticipate their movement and profit from it.
Free Annual Reports