Definition
An interest rate is the percentage charged on a loan or earned on an investment over a specific period. For borrowers, it represents the cost of borrowing money. For savers and investors, it represents the return on their money. Interest rates can be fixed (stay the same) or variable (change with market conditions).
Formula
Where P is principal, r is the annual interest rate (decimal), t is time in years, n is compounding frequency, A is the final amount, and I is interest earned.
Example
Savings Account Example
If you deposit $10,000 in a savings account with a 4% annual interest rate compounded monthly, after one year you would have approximately $10,407. The $407 earned is compound interest. For a loan, if you borrow $20,000 at 6% simple interest for 3 years, you would pay $3,600 in total interest ($20,000 × 0.06 × 3).
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