- The percentage of a principal amount is called the interest rate
- Denoted in formulas by an r, and is converted to its decimal equivalent for computing purposes
- With respect to loans, the interest rate is a factor in computing how much it will cost a borrower to borrow money, and how much a lender will earn to lend money
- If the rate increases, the cost for a borrower to borrow money goes up, and as a result, the amount earned by the lender also goes up if all other factors stay the same such as the term of the loan
- Application: Computing monthly auto loan payment
An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). 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. Other interest rates apply over different periods, such as a month or a day, but they are usually annualized.
The interest rate has been characterized as "an index of the preference . . . for a dollar of present [income] over a dollar of future income." The borrower wants, or needs, to have money sooner rather than later, and is willing to pay a fee—the interest rate—for that privilege.