What is an interest rate?
In short
An interest rate is the price of borrowing money, and the reward you are offered for saving it.
In plain words
If you borrow, interest is the extra you repay on top of the amount you borrowed. If you save, interest is what the bank pays you for the use of your money. Rates are usually quoted as a percentage a year. A higher rate makes borrowing dearer and saving more attractive. A lower rate does the opposite.
A simple example
Borrow £1,000 at 10% a year and, if you repaid nothing along the way, you would owe £100 of interest after one year, before any fees. A mortgage or a credit card is the same idea over a longer life, usually with extra charges. The rate you actually pay is often higher than the Bank of England's Bank Rate, because lenders fund themselves in markets and add a margin.
Why it matters
Interest rates are the main tool the Bank of England uses to steer inflation. When spending is pushing prices up, a higher Bank Rate cools borrowing and demand. When the economy is weak, a lower rate can encourage spending, as long as that does not set inflation racing. Rates also decide how hard mortgages, credit cards, and business loans feel month to month.
Easy to mix up
Bank Rate is not the rate on your mortgage or your savings account. Lenders set their own prices around it. The advertised rate can also differ from the full cost: for many consumer loans the APR folds in compulsory fees. And a 5% interest rate does not mean you are 5% better off if prices are rising by about 5%. After inflation, the real gain can be roughly nothing.