What is an interest rate?

An interest rate represents the cost of borrowing money, expressed as a percentage of the principal amount borrowed. This figure essentially indicates how much the borrower must pay the lender in addition to repaying the loan amount (the principal) over a specified period. Interest rates can vary based on factors such as the lender's policies, the borrower's creditworthiness, and prevailing economic conditions.

In the context of loans, the interest rate serves to compensate the lender for the risk taken and for the opportunity cost associated with lending the money. Thus, it plays a crucial role in financial transactions and is a fundamental concept in personal finance.

The other options pertain to different aspects of banking or financial transactions but do not accurately define interest rates. For example, the fee for withdrawing cash from an ATM refers to transaction fees rather than the concept of borrowing costs. Similarly, the investment amount in a mutual fund relates to investments rather than borrowing, and a fixed charge per transaction is also more aligned with service fees than with the interest rate concept.