Interest rate

An interest rate is the cost of borrowing money, expressed as a percentage of the amount borrowed. When you take a loan, you pay interest to the lender. When you deposit money in a savings account, the bank pays you interest. The rate is typically quoted as an annual percentage, so a 5% rate means 5% of the principal per year, though the actual payment may be divided into monthly or quarterly installments.

Interest rates determine what you pay to borrow and what you earn to save, so they shape every financial decision. A higher rate makes a mortgageTermMortgage×الرهن العقاريA loan secured by property, where the lender holds a claim on the house until the debt is repaid.Open the term or car loan more expensive; a lower rate makes it cheaper. The same applies in reverse for deposits: a higher rate rewards saving, a lower one does not.

And a rate can move after the agreement is signed. A fixed rate holds until the term ends; a variable one follows a benchmark, so a payment set in one year can be a different payment two years later without anything about the borrower having changed. Both are quoted the same way on the day they are signed, and the difference between them shows up only later, in the payment.

• The rate you are quoted is rarely the only cost. Banks add fees, and the effective rate you actually pay is higher than the headline number.
• Rates vary by product and by borrower. A credit cardTermCredit card×بطاقة ائتمانA card that lets you borrow money to pay for purchases now and repay the bank later, usually with interest.Open the term charges far more than a mortgage; a person with a strong credit scoreTermCredit score×التصنيف الائتمانيA numerical rating based on your payment and borrowing history that tells lenders whether you are likely to repay a loan and on what terms.Open the term pays less than one with a weak one.
• Nominal rates and real rates are different. A 5% deposit rate in a year when inflationTermInflation×التضخّمA general rise in prices over time, so one riyal today buys less than it did a year ago.Open the term runs at 6% is a negative real return: you are losing purchasing power even though your balance grew.
• Central banksTermCentral bank×البنك المركزيThe government's bank, which controls the money supply, sets interest rates, and oversees all other banks in the country.Open the term use interest rates as their main tool to control inflation and manage economic growth, so rates change over time in response to economic conditions.