An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed. It is the cost of borrowing money, expressed as a percentage of the loan or amount of credit card borrowing. The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, the compounding frequency, and the length of time over which it is lent, deposited, or borrowed. The annual interest rate is the rate over a period of one year, but other interest rates apply over different periods, such as a month or a day, and they are usually annualized.
There are different types of interest rates, such as the interest rate on a loan, which is typically noted on an annual basis known as the annual percentage rate (APR) . An interest rate can also apply to the amount earned at a bank or credit union from a savings account or certificate of deposit (CD), and the interest earned on these deposit accounts is referred to as the annual percentage yield (APY) .
The interest rate charged by a lender to a borrower depends on several factors, including the borrowers credit score and other factors that can play a significant role in credit approval and interest rates. A borrower that is considered low risk by the lender will have a lower interest rate, while a loan that is considered high risk will have a higher interest rate.
It is important to note that the APR is a broader measure of the cost of borrowing money than the interest rate, as it reflects the interest rate, any points, mortgage broker fees, and other charges that you pay to get the loan.
