What is Interest?

Interest is the cost of borrowing money for a certain period of time.

How Does Interest Work?

Let's assume you need $500,000 to buy a house. The 'price' of borrowing that money is interest, and it is expressed as a percentage of the amount of money you obtain. The borrower pays the interest to the lender. The rate of interest reflects the time value of money, the borrower's credit risk, inflation rates and a variety of other market conditions.

Why Does Interest Matter?

Interest rates are some of the most powerful and influential components of an economy. As a result, most countries take a keen interest, if not an active role, in monitoring interest rates. They also affect individual, day-to-day consumer decisions, such as determining whether it's a good time to buy a house, borrow money for a college degree, or put money in a specific type of bank account.

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Paul Tracy
Paul Tracy

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 3 million monthly readers.