interest rate

An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed. Interest rate periods are ordinarily a year and are often annualized when not. Alongside interest rates, three other variables determine total interest: principal sum, compounding frequency, and length of time.

Interest rates reflect a borrower's willingness to pay for money now over money in the future. In debt financing, companies borrow capital from a bank, in the expectation that the borrowed capital may be used to generate a return on investment greater than the interest rates. Failure of a borrower to continue paying interest is an example of default, which may be followed by bankruptcy proceedings. Collateral is sometimes given in the event of default.