Interest Rate Definition

The interest rate of a loan, universally expressed as a percentage per time period, is the sum of money charged in order to obtain the loan. The money actually borrowed is referred to as the principal and the sum of money charged to use the principal is called the interest. The interest rate determines how much interest will be charged to use the principal. For example, if you borrow $50,000 at a 9% annual interest rate on an amortizing loan, the loan will accumulate about $4,500 worth of interest charges in the first year (note that the interest rate varies a little from the effective interest rate, because monthly payments will slowly reduce the principal).