What It Is:

Interest is the cost of borrowing money for a certain period of time.

How It Works/Example:

Let's assume you need $500,000 to buy a house. The "price" of borrowing that money is interest, and it is expressed as a percentage of the amount of money you obtain. The borrower pays the interest to the lender. The rate of interest reflects the time value of money, the borrower's credit risk, inflation rates and a variety of other market conditions.

Why It Matters:

Interest rates are some of the most powerful and influential components of an economy. As a result, most countries take a keen interest, if not an active role, in monitoring interest rates. They also affect individual, day-to-day consumer decisions, such as determining whether it's a good time to buy a house, borrow money for a college degree, or put money in a specific type of bank account.