Interest rate [1] is something that is heard a lot when people are using credit. It means the rate or price borrowers will pay for the use of money that is not their own. For example, if a company is using a business loan from a bank [2] to start its business then the return the lender will receive on that loan is the interest that is charged to the borrower for the use of those funds. Interest rates [1] are usually characterized by a percentage rate that is extended over a period of one year.
Interest rates targets are a very important tool of monetary policy. They are used to control things like investment, inflation [3] and unemployment. Throughout history, interest rates have been set by governments or by central banks [2].
Why are there changes in interest rates? This can happen for a variety of reasons. One of these reasons is deferred consumption. When a lender loans money, the lender will delay spending money on consumption goods. Since most people prefer having things right away instead of waiting for goods this usually means that in a free market there will be a positive interest rate.
Another reason that has recently hit close to home in the United States is risks of investment. There is always a risk that the borrower will not be able to pay back a loan or will go bankrupt or default on the loan. In some cases, the lender will charge a risk premium to mitigate some of these lending risks.