What is the definition of interest rate?

The definition of interest rate is best captured by the concept of the percentage charged on borrowed money or earned on invested funds. An interest rate represents the cost of borrowing money, expressed as a percentage of the principal amount borrowed, or the return on investment earned on funds that are deposited or invested. This fundamental concept establishes the basis for various financial transactions and investments, influencing decisions related to loans, mortgages, and savings accounts.

Interest rates are crucial for borrowers and investors alike, as they determine how much extra money will need to be paid back on a loan or how much will be earned on deposited funds. It is a key element in understanding the time value of money and is integral to personal finance, business decisions, and economic policy.

The other options do not accurately define interest rates. For instance, a fixed amount for services rendered pertains to fees rather than the concept of interest on money. The total cost associated with a loan includes principal and interest but does not isolate the interest rate itself. The variable charge applied to credit card purchases relates more to fees or varying interest, which again does not reflect the fundamental definition of an interest rate.