In banking terminology, the term Interest Rate refers to the cost of borrowing money or the return on lending it. The Interest Rate on a loan or deposit can be either fixed or variable.
For example, the Interest Rate on a $1,000 loan over period of a year which results in a total repayment of $1,100 at the end of that year is 10% per annum. This loan also results in the increase in the principal lent at that 10% Interest Rate by the sum of $100, which would be called interest. For countries in which many people use credit, Interest Rates tend to make up an important component of the economic mechanisms acting in society. The level of the Interest Rate prevailing in the market tends to reflect overall economic conditions, as well as the monetary policy set by a country’s central bank through their benchmark Interest Rates. Interest Rates are flexible and tend to fluctuate around their average values, depending on monetary policy and the bond market, with a large demand for capital and inflationary tendencies in the economy tending to be reflected in a higher level of Interest Rates.