What is Interest?

Interest is the price paid for the use of borrowed money or the compensation received for lending it. It's usually quoted as an annual percentage of the principal amount, known as the interest rate. Central banks, like the Federal Reserve (the Fed), set key policy interest rates which influence the cost of loans, returns on savings, and overall economic activity, including inflation.

When interest rates rise, borrowing becomes more expensive, which can slow down spending and investment. Conversely, higher rates make saving more attractive, as deposits earn more. This dynamic makes interest a fundamental tool for managing the economy and a core factor in personal finance decisions, from mortgages to savings accounts.