Glossary Terms


Reviewed by Melissa Cook
Updated March 3, 2023

In financial terms, interest is the cost of borrowing money. It is usually expressed as a percentage rate that must be paid by the borrower to the lender for the use of their funds. 

Interest can also refer to the return you earn on an investment or savings account, or it could be used in reference to dividends earned from stocks or other investments. 

Generally speaking, when someone borrows money they pay interest; when they save money, they receive interest.

The interest rate typically depends on factors such as: how much is being borrowed, how long it will take to repay, and the creditworthiness of the borrower. 

It also reflects economic conditions like inflation and availability of lending capital. In some cases, borrowers may negotiate a lower rate based on collateral or other factors.

Interest is an important component of the financial markets, as it provides incentive for lenders to make money available for borrowers. This can help people and businesses access capital that they don’t have on hand, enabling them to purchase items or make investments that may be beneficial in the long run. 

Interest also encourages saving, which helps individuals and companies build wealth.

It’s important to remember that interest rates can change over time and vary from lender to lender. The key to getting a good rate is doing research, comparing offers and understanding your own financial situation. 

By being informed about interest rates and how they operate, you can use them to your advantage when investing or borrowing money.