Interest rates are a crucial aspect of money markets and impact the flow of funds within an economy. These rates are set by central banks to administer monetary policy, promote economic growth and control inflation. Individuals and companies consider interest rates when applying for loans, saving for the future or investing in assets. Understanding how rates work is essential to making sound financial decisions.

The definition of an interest rate is the value paid by debtors to lenders for the right to use their funds. It is expressed as a percentage of the main value of the loan or investment. It may be simple or compound, depending on the type of financial product and the lending or saving term.

Borrowers consider interest rates when choosing a mortgage, car or credit card. Investors evaluate potential gains on investments and savings accounts look at the APY or yield (annual percentage return) to make well-informed choices.

Rising interest rates can negatively impact people and businesses. When borrowing becomes more expensive, it discourages spending. This in turn can reduce employee productivity and lower company earnings, which can cause stock prices to fall. In contrast, low interest rates can stimulate the economy by encouraging investment and spending, which can lead to job creation and growth in business revenue. Interest rates also influence the returns on investment, GICs and savings accounts by providing a financial incentive to save and invest money. Learn more about how interest works, its benefits and how it affects your finances.