Legal Definitions - rate of interest

The rate of interest refers to the percentage charged by a lender for the use of borrowed money, or the percentage paid by a financial institution to a saver for depositing funds. It is typically expressed as an annual percentage of the principal amount (the original sum borrowed or deposited).

Here are some examples to illustrate the concept:

• Example 1: Home Mortgage

  When a family takes out a loan to purchase a house, the bank might offer them a mortgage with a rate of interest of 4.5%. This means that, in addition to repaying the principal amount of the loan, the family will pay an extra 4.5% of the outstanding loan balance each year as a fee to the bank for lending them the money. This percentage directly determines the cost of borrowing for their home.

• Example 2: High-Yield Savings Account

  An individual deposits money into a high-yield savings account at a bank. The bank advertises a rate of interest of 2.0% on deposits. In this scenario, the bank is paying the account holder 2.0% of their deposited money annually as a return for allowing the bank to use their funds. This percentage represents the earnings the saver receives on their savings.

• Example 3: Credit Card Debt

  Someone uses their credit card to make purchases but does not pay the full balance by the due date. Their credit card agreement states an annual percentage rate (APR), which is essentially the rate of interest, of 22%. If they carry a balance, the credit card company will charge 22% of the outstanding amount over a year, significantly increasing the total cost of their purchases due to the high interest charged on the borrowed funds.