In simple terms
An interest rate is the price of using someone else’s money. Borrowers pay it to lenders, and savers earn it on their deposits. It is usually shown as a yearly percentage of the amount borrowed or saved.
If you save 1,000 in any currency at 2.5% a year, you earn 25 in interest after one year. A loan at the same rate costs about 25 a year for every 1,000 still owed, before any fees.
How it works
A central bank sets a key rate for its currency. When it raises that rate, commercial banks usually charge more on loans and pay more on savings. When it cuts the rate, both tend to fall. Each lender then sets its own rates for different products, so rates vary between loans and accounts.
Two related ideas help show the full picture:
- Real interest rate: the stated, or nominal, rate minus inflation. Saving at 2.5% while prices rise 3% gives a real rate of minus 0.5%, so your money buys slightly less a year later.
- Annual percentage rate (APR): in the United States, a loan’s APR adds the lender’s fees to the interest rate, giving a fuller measure of the cost.
Names and disclosure rules for these measures differ from country to country.
Why it matters
Interest rates shape household budgets. The Bank of England gives a UK example: a 130,000-pound mortgage over 25 years costs about 583 pounds a month at 2.5%, but about 651 pounds at 3.5%.
Across a whole economy, changes in short-term rates pass through to longer-term rates and then to spending, borrowing and prices. That is why central bank rate decisions make headlines around the world.
Where you’ll see it
- Mortgage, car loan and credit card offers.
- Savings account and deposit rates.
- Central bank announcements and financial news.
- Government bond markets.
Example
The bank offered a fixed interest rate of 4% a year for the first five years of the loan.
Often confused with
APR. The interest rate is the cost of borrowing alone. The APR also includes certain fees, so it gives a fuller picture of the total cost of a loan.
Key facts
- The Bank of England describes interest as the cost of borrowing money or the reward for saving.1
- When the Bank of England raises Bank Rate, banks usually increase what they charge on loans and the interest they offer on savings.1
- The real interest rate equals the nominal interest rate minus inflation. A 2.5% savings rate with 3% inflation gives a real rate of minus 0.5%.2
- In the United States, a loan's APR is the interest rate plus other fees charged by the lender, such as origination charges.3
- Central banks influence short-term interest rates through open market operations, and these changes pass through to longer-term rates and wider economic activity.4
This entry explains a financial term. It is not financial advice.
Go deeperHow Do Interest Rates Affect the Economy?Related concepts
In the news
Quick checkYour savings earn 2% a year while prices rise 3%. What is your real interest rate?Show answer
Minus 1%: the nominal rate (2%) minus inflation (3%).
Sources
- Bank of England. What are interest rates?. 30 July 2026 (updated) (accessed 11 September 2026)
- European Central Bank. What is the difference between nominal and real interest rates?. 25 May 2016 (accessed 11 September 2026)
- Consumer Financial Protection Bureau. What is the difference between a loan interest rate and the APR?. 28 August 2026 (last reviewed) (accessed 11 September 2026)
- International Monetary Fund. Monetary Policy and Central Banking (factsheet). April 2025 (last updated) (accessed 11 September 2026)
Editorially reviewed by Specialty Digest Editorial TeamLast reviewed September 11, 2026Researched and drafted with AI assistanceReport an issue