Interest rate

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An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, the compounding frequency, and the length of time over which it is lent, deposited, or borrowed.

The annual interest rate is the rate over a period of one year. Other interest rates apply over different periods, such as a month or a day, but they are usually annualized.

The interest rate has been characterized as "an index of the preference . . . for a dollar of present [income] over a dollar of future income."^[1] The borrower wants, or needs, to have money sooner, and is willing to pay a fee—the interest rate—for that privilege.