An example of an interest rate is 5% per year on a loan.
When you borrow money, lenders charge interest as the cost of borrowing. This is typically expressed as a percentage of the loan amount. This percentage is the interest rate.
Let's break down the 5% example:
- Scenario: You borrow \$100.
- Interest Rate: 5% per year.
- Interest Charged: 5% of \$100 = \$5.
- Total Repayment: \$100 (principal) + \$5 (interest) = \$105.
The lender earns \$5 for allowing you to use their \$100 for the duration of the loan. Different types of loans, such as mortgages, car loans, and personal loans, all have their own associated interest rates. The actual rate depends on factors such as the borrower's creditworthiness, the loan amount, and the prevailing economic conditions.
