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Interest rates

Definition

Interest rates refer to the cost or price paid for borrowing money or using credit, usually expressed as a percentage per year. They represent how much extra you need to pay back on top of what you borrowed.

Analogy

Think about interest rates like renting money from someone else's piggy bank. When you borrow money, you have to pay rent (interest) for using that person's savings until you return it.

Related terms

Federal Reserve (Fed): The Fed is responsible for setting monetary policy in the United States, including controlling short-term interest rates through its actions such as adjusting reserve requirements or buying/selling government securities.

Prime Rate: The prime rate is the interest rate that commercial banks charge their most creditworthy customers. It serves as a benchmark for other interest rates in the economy.

Compound Interest: Compound interest is when you earn or pay interest not only on the initial amount of money but also on any accumulated interest. It allows your savings or debt to grow faster over time.