What is the definition of interest rates?

Interest rates are best understood as the cost of borrowing expressed as a percentage. This definition captures the fundamental concept of interest rates, which represents the amount a borrower pays in addition to the original sum borrowed (the principal). When an individual or business takes out a loan, the lender charges interest as compensation for the risk of lending and for giving up the opportunity to use that money for other purposes.

For example, if a loan has an interest rate of 5%, it means that, for every $100 borrowed, the borrower will need to repay $105 at the end of the loan period. This percentage format allows for straightforward comparisons across different loan offers, helping borrowers make informed financial decisions.

The other options do not accurately capture the essence of what interest rates represent. The return on savings accounts pertains to money earned on savings rather than the cost to borrow, while total savings in the economy reflects a broader economic measure rather than the specific concept of borrowing costs. Lastly, the percentage fee for deposits held in banks may be related but does not define interest rates as they pertain to loans. Therefore, the first choice aligns precisely with the definition and function of interest rates in economics.