Interest rate

Definition

‘Interest rate’ refers to the cost of borrowing money or the return earned on an investment, typically expressed as a percentage.

What is an interest rate?

An interest rate is a fundamental concept in finance and economics. When you borrow money, such as taking out a business loan or using a credit card, the interest rate represents the extra amount you must pay back to the lender in addition to the principal amount borrowed. On the other hand, when you invest money in a savings account, bond, or other financial instrument, the interest rate determines how much you’ll earn over time.

For instance, if the interest rate is high, borrowing becomes more expensive, which can discourage spending and borrowing. Conversely, when interest rates are low, borrowing becomes cheaper, potentially encouraging people and businesses to borrow and spend more.

Example of interest rate

John, a small business owner, decides to expand his business and needs financial assistance. He approaches ABC Bank for a business loan, and applies for a loan of R50,000 to fund his business expansion

ABC Bank, after evaluating John’s creditworthiness and the business plan, offers him a loan at an annual interest rate of 6% and John will repay the loan amount plus interest rates over a period of 3 years.

Interest = Loan amount x Interest rate = R50,000 x 0.06 = R3,000

Total repayment = Loan amount + Interest rate = R50,000 = R3,000 = R53,000

In this example, the interest rate of 6% represents the cost of borrowing for John’s business loan. It determines the amount of interest he will pay annually on the loan amount.

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Disclaimer: Swoop Finance helps South African firms access business finance, working directly with businesses and their trusted advisors. We are a credit broker and do not provide loans or other finance products ourselves. We can introduce you to a panel of lenders, equity funds and grant agencies. Whichever lender you choose we may receive commission from them (either a fixed fee of fixed % of the amount you receive) and different lenders pay different rates. For certain lenders, we do have influence over the interest rate, and this can impact the amount you pay under the agreement. All finance and quotes are subject to status and income. Applicants must be aged 18 and over and terms and conditions apply. Guarantees and Indemnities may be required. Swoop Finance can introduce applicants to a number of providers based on the applicants’ circumstances and creditworthiness. Swoop Finance (Pty) Ltd is registered with CIPC in South Africa (company number 2023/820661/07, registered address 21 Dreyer Street, Cape Town, South Africa, 7708).

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