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What is interest?

Interest is the cost of using someone else’s money. It’s usually a percentage of the total loan, or principal, and is expressed as an annual rate.

Interest can both positively and negatively impact individuals. For those who keep money in savings accounts, CDs, or money markets, high interest rates will result in higher payouts to those individuals. For those who are borrowing money from a person or organization, interest increases the money they owe their lender over time.

Interest rates can change depending on macroeconomic trends in the economy, such as the federal funds rate (the rate at which banks loan each other money overnight, set by the Federal Reserve). Interest rates can also directly impact the returns of certain investments, such as bonds, as longer duration bonds' prices fall as interest rates increase.