Glossary - Interest Rate
An interest rate is the amount charged on top of the principal by a lender to a borrower for the use of assets. It is usually expressed as a percentage of the principal. The interest rate on loans is typically noted on an annual basis known as the annual percentage rate (APR). Interest rates apply to most lending or borrowing transactions. Individuals borrow money to purchase homes, fund projects, start businesses, or pay for college tuition. Businesses take loans to fund capital projects and expand their operations by purchasing fixed and long-term assets such as land, buildings, and machinery. Interest rates are a vital tool of monetary policy and are taken into account when dealing with variables like investment, inflation, and unemployment.
Also known as
- APR
- Annual Percentage Rate
Use cases examples
- Loan Agreement: The borrower agrees to pay the lender an annual interest rate of 5% on the outstanding loan balance.
- Mortgage Agreement: The annual interest rate for this mortgage shall be fixed at 3.75% for the thirty-year term of the loan.
Considerations for investors
- Assess the risk of interest rate fluctuations on investment returns, particularly in fixed-income investments.
- Evaluate the borrower's ability to service the debt at the current and potentially higher interest rates in the future.
Considerations for founders
- Understand the impact of interest rates on cash flow and budget, especially for debt financing options.
- Consider the implications of variable vs. fixed interest rates on long-term debt obligations.
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