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What is an interest rate?

In one line: An interest rate is the price of borrowing money, shown as a yearly percent of the amount borrowed, paid by the borrower to the lender.

Trading glossary · Updated 2026-10-21

A simple example

Borrow $1,000 for one year at a 6% rate. You pay back $1,000 plus 6% of $1,000.

• Interest: 0.06 × $1,000 = $60.
• Total paid back: $1,060.

If you're the lender, like when you put money in savings or buy a Bond, the interest is paid to you instead.

Over many years interest can compound: you earn interest on past interest. The compound interest calculator shows how.

Why it matters

Every loan in the economy is priced off rates. Mortgages, car loans, company borrowing and government bonds all react when rates change.

A Central bank sets the shortest rate. In the US that's the Federal Reserve's Fed funds rate. Longer rates, like the 10-year Treasury Bond yield, are set by buying and selling in the market.

Higher rates tend to:

• Make borrowing more expensive, which can slow spending.
• Make safe savings more attractive compared with stocks.
• Lift a currency, as money moves toward higher yields.

Lower rates tend to do the opposite. Nothing is guaranteed, but this is why rate news moves stocks, forex, gold and crypto. Our guide on how interest rates affect stocks traces the chain.

A common mistake

Thinking "rates" is one number. Short rates and long rates can move in different directions. The Fed can cut its rate while 10-year yields rise. The Yield curve shows them side by side.

Questions