Introduction to Interest Rates

By Jodi Beggs, About.com Guide

Interest, in an economic or mathematical context, can either be thought of as the costs of borrowing money or the returns from lending money, depending on one's perspective. In either case, interest reflects the time value of money, or the principle that people would generally rather have money today than tomorrow.

Interest rates are usually defined as a fraction or percentage of the amount being borrowed or loaned, and they are defined over a particular period of time. For example, a reasonable interest rate could be given as 5 percent per year. For a borrower, this means that he will pay $5 per year for each $100 of principal borrowed (in addition to giving back the original $100), and, for a lender, this means that he will receive $5 per year (again, in addition to getting the original $100 back).

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