Interest is the fee that a borrower pays for borrowing assets from a lender. Interest is usually expressed as a percentage, which is called the interest rate. In other words, the interest rate is the price that someone pays for the use of funds that are not theirs. For instance, customers borrowing money from the bank pay the bank interest for the use of their money. Likewise, when the customer deposits money in an account with the bank, the bank pays interest to the customer for using the customer's money, since deposits are counted as part of the total asset/liability structure of the bank. The most common asset that people borrow is of course money (cash), however you can borrow many other financial assets like stocks for example (short-selling comes to mind). You can think of interest as one major costs of borrowing capital.

An interest rate, then, represents the price of money or cash as a good or service. Since interest rates are expressed as percentages, only a small amount of the total amount of the loan or deposit is charged as the price. That being said, the amount charged by the interest rate can be very high if the total cash amount is high; for example, high rates mean thousands of dollars in interest, depending on the precise rate and the amount of the balance in question. Interest rates are used in many areas of finance, from commercial savings and lending, to central banks like the Federal Reserve or the Bank of Canada setting monetary policy.

When lender (bank, financial institution, or individual) loans money to a borrower, they want to be compensated for the use of the capital and this compensation comes in the form of interest on the loaned asset. For example if a consumer wants to buy a car, the obvious solution is to go to the bank and apply for a car loan. Another example would be if somebody has damaged credit and applies for a bad credit loan. In both examples the bank will charge the customer interest, which is based on the value of the loan. For example if a borrower borrows $10,000 from BMO the bank might charge the customer 10% interest per year on the loan amount (principal). In this case the customer will pay $1,000 in interest fees per year. The percentage that is used to calculate the interest on a loan is known as interest rate. The interest rate on a loan will depend on the credit-worthiness of the borrower. Borrowers with poor credit will get higher interest rates, because loaning to them is riskier. For example a borrower who recently filed for bankruptcy, might not be able to get any credit, except for a secured credit card, which might be with high interest rate. Prime borrowers on the other hand usually enjoy much lower interest rates

The interest rate is usually charged annually, which can be once a month or once a year, depending on the type of account. The good news is that since interests are expressed as percentages per year, it is possible to compare interest rates from different types of loans, and even different currencies in foreign countries. Interest rates are both a measure of the current state of the economy, of where funds can be sent to earn the highest rates and where loans can be sent that will do the economy the most good, and income and cost to lenders and borrowers, respectively.

Many people become confused by interest rates because they think there are arbitrary and charged only to extract money. This is not true; banks such as the Royal Bank of Canada charge interest rates because like all prices they reflect the current state of their monetary supplies, whether they are high or low, and thus reflects the supply of cash available in the economy at large. There are several reasons for interest rates, from both the lenders' and borrowers' point of view.

For lenders, interest rates act as a hedge against inflation, compensation for the risks of lending, and as revenue for covering the costs of staying in business. From the borrower's point of view, interest is the price to pay for borrowing money for purposes like making purchases, such as a home, for which they do not have the funds available to pay for the purchase outright. For savers, interest provides an incentive to save at least a portion of their money instead of spending everything as it comes in.

Interest rates are necessary for economic growth, both on a personal and national level.