What's an Interest Rate?

When a person or institution borrows money, in either loan or bond form, there is a cost associated with borrowing this money. An Interest Rate determines the amount of money a person or institution has to pay when they borrow money. The person or institution borrowing the money is called a Borrower or Obligor.

An interest rate is usually an annual rate. Which means it’s the amount of money the borrower must pay each year until the money is repaid.

To determine the annual dollar amount, you multiply the interest rate by the amount you borrowed. The dollar amount owed is called Interest.

Often the borrower will pay the interest in installments, or payments, throughout the year, such as monthly, quarterly or semi-annually.

The person or institution loaning the money is called a Lender or Creditor. And the interest is the lender’s return, or money the lender makes in exchange for loaning the money.

Remember, the interest rate determines the borrower’s cost to borrow and the lender’s return for lending.

 

 

 

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