Interest Rate

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Definition of 'Interest Rate'

An interest rate is the percentage of the principal amount of a loan or investment that is charged or earned as compensation for the use of money. In other words, an interest rate is the amount that a borrower pays to a lender for the use of funds, or the amount that an investor earns on an investment.

For example, if someone borrows $1,000 at an annual interest rate of 5%, they would owe the lender $50 per year in interest. Similarly, if someone invests $1,000 in a savings account with an interest rate of 2%, they would earn $20 in interest per year.

Interest rates can be fixed or variable, and can vary widely depending on the type of loan or investment and the overall economic environment. Factors that can affect interest rates include inflation, government policy, economic growth, and market conditions.

Interest rates are an important consideration in many areas of finance, including lending, borrowing, and investing. They can have a significant impact on an individual's financial situation, and it's important to carefully consider the interest rate when making financial decisions.

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