What are interest rates?

Interest rates are defined as the cost of borrowing money expressed as a percentage. When you borrow money, such as through loans or credit cards, the lender charges a certain percentage of the amount borrowed as a fee for providing the funds. This percentage varies based on several factors, including the lender's policies, the borrower’s creditworthiness, and prevailing economic conditions.

Understanding interest rates is crucial because they directly impact how much you will need to repay in addition to the principal amount borrowed. For instance, if someone takes out a loan with an interest rate of 5%, they will owe back the principal plus 5% of that principal as the cost of borrowing.

Knowing the role of interest rates can help individuals make informed financial decisions, such as evaluating whether to take out a loan or comparing different credit options. This concept is fundamentally important in personal finance, as it affects debt management, savings growth, and overall financial planning.

The other options refer to different financial concepts. Late payment penalties relate to fees incurred when payments are not made on time, while fees for managing investment accounts are costs associated with investment services. Monetary rewards from savings accounts typically involve interest that can be earned on deposits, but this doesn't encompass the broader definition of interest rates as a cost