An interest rate is the price of money. It is what you pay to borrow and what you earn to save. Rates are expressed as a percentage of the principal, usually per year. A 5 percent interest rate on a $1,000 loan means $50 per year.

Central banks set a benchmark rate. Commercial banks add a margin. Mortgage rates, credit card rates, and savings rates all trace back to that benchmark. When the central bank raises rates, borrowing gets more expensive. When it cuts, borrowing gets cheaper.

Rates affect everything. They shape business investment, consumer spending, and currency values. Low rates encourage risk-taking and can fuel bubbles. High rates slow the economy and can cause recessions. Finding the right level is one of the hardest jobs in economic policy.

Types of rates

• Policy rate set by central banks
• Prime rate for best customers
• Mortgage rates
• Credit card rates
• Savings account rates