An interest rate is the price of borrowing money

STEP 1An interest rate is the fee for using money

This is the first lesson of Part 3, "Interest rates." The brick we lay at the very bottom is quite simple: an interest rate is the price of using someone else's money.

The most basic formula for calculating interest

1. 3% a yearKRW 100 million × 0.03 = KRW 3 million (about KRW 250,000 a month)
2. 5% a yearKRW 100 million × 0.05 = KRW 5 million (about KRW 417,000 a month)
3. DifferenceThe rate rose 2 percentage points, but interest rose KRW 2 million, about 67%

Here you need to distinguish between "%" and "percentage points (%p)." When a rate goes from 3% to 5%, it has risen 2 percentage points, and the interest burden has grown about 67% from 3 to 5. A "0.25 percentage point hike" in the news may look small, but the lower the rate level, the larger the percentage change in the interest burden. Real loans reduce interest as you repay principal in installments, but this simple formula is enough to get a feel for interest rates.

Why are deposit rates and lending rates different?

In the circular flow of Lesson 2, money that households saved flowed through the financial markets to companies and households that needed money. Banks sit along that path. They borrow money from depositors by paying the deposit rate, then lend it to borrowers at the lending rate. The lending rate must be higher than the deposit rate for the bank to pay staff salaries, prepare for the risk of loss, and make a profit.

In fact, in August 2026 the average rate on new time deposits at Korean deposit banks was 3.14% a year, and the average rate on newly issued loans was 4.40% a year. That 1.26 percentage point gap is what banks earn for "intermediating" money. What this gap means for bank profits is covered in detail in Lesson 18.

Source: Bank of Korea ECOS, deposit bank weighted average interest rates (new business basis), 121Y002 time deposits and 121Y006 average loans, August 2026. Checked 2026-10-05.

STEP 2How are interest rates set?

In STEP 1 we learned that an interest rate is the fee for using money. So who sets that fee, and how? Demand and supply from Lesson 3 appear again.

The two layers that make up a lending rate

The first layer is the underlying rate. The policy rate set by the Bank of Korea is the starting point, and the cost at which banks raise funds (deposit rates, bank bond yields and so on) moves along with it. Who sets the policy rate and why is covered in Lesson 13, and the rates that move every day in the market in Lesson 14.

The second layer is the credit spread. This is why loan rates differ from person to person, even at the same bank on the same day. Banks add a bigger premium the higher the risk of loss, the longer the lending period, and the less collateral there is. That is why mortgage loans, which take a house as collateral, generally carry lower rates than unsecured credit loans. The same goes for companies. Large companies with strong finances borrow at low rates, while heavily indebted companies borrow at high rates.

Fixed and floating rates

A fixed-rate loan keeps the same rate for the promised period. A floating-rate loan is reset to follow the base rate at set intervals (usually 3 to 6 months). When rates are rising, floating-rate borrowers' interest grows quickly within a few months; when rates are falling, it shrinks. That is why a policy rate hike reaches households faster and harder in countries with more floating-rate loans.

Simple interest, compound interest, and the real interest rate

So far we have calculated with simple interest, which applies interest to the principal only. With compound interest, where interest earns interest, the longer you hold, the bigger the difference. KRW 100 million at 5% compounded for 10 years becomes about KRW 162.89 million, KRW 12.89 million more than with simple interest (KRW 150 million). You can check it yourself with the Compound Interest Calculator.

Also, as you learned in Lesson 7, interest rates must be viewed together with inflation. Even if the deposit rate is 3%, if prices rise 4% the real interest rate is about −1%. For the borrower, conversely, the real burden shrinks. To judge whether rates are "high" or "low," it is always more accurate to use the real rate, after subtracting inflation.

See it in a picture: my interest calculator

Choose either a loan or a deposit, then move the amount and the interest rate. The bar at the bottom is one year of interest at the rate you chose.

STEP 320 years of Korean interest rates and your stocks

Now that we have built up the calculation method and how rates are set, let's look at how actual Korean interest rates moved over the past 20 years and connect them to stocks.

Three big waves in 20 years

Around the 2008 financial crisis. The policy rate was 5.00% at the end of 2007, then was cut sharply to 2.00% by 2009 when the crisis hit. The average loan rate also fell from 7.17% in 2008 to 5.51% in 2010.

The ultra-low rates of 2020. After the COVID-19 shock, the policy rate was cut to 0.50%, and the time deposit rate averaged 1.04% in 2020, the lowest since statistics began in 1996. This period, when borrowing was very easy, overlaps with the recovery and expansion of Lesson 5, and with the surge in stock and real estate prices.

The 2022 surge. As inflation soared (Lesson 7), the Bank of Korea raised the policy rate from 1.00% to 3.25% in 2022 alone. Deposit rates jumped from 1.05% in 2021 to 3.68% in 2023, and the average loan rate from 2.88% to 5.19%. The policy rate later came down to 2.50% by the end of 2025, then rose again in July and August 2026 to 3.00%.

Feel it with a floating-rate mortgage

You can feel how strongly rising rates transmitted to households by looking at mortgage rates. The average rate on newly issued mortgages rose about 2.2 percentage points in 1 year and 9 months, from 2.63% in January 2021 to 4.82% in October 2022.

Rate source: Bank of Korea ECOS 121Y006 mortgages (new business). KRW 300 million is an example amount, and one year of interest was calculated simply, without principal repayment. Checked 2026-10-05.

On the same KRW 300 million, the monthly interest has increased by roughly KRW 550,000. That much less money is left to spend elsewhere. Recall "spending = someone's income" from Lesson 2, and you can see that this interest burden can spread into lower sales for dining out, travel and shopping.

For stocks: interest rates shake three places at once

Apply interest rates to "stock price = earnings × multiple" from Lesson 1, and rising rates reach stock prices through three paths.

There is one more. When deposit rates rise to 3–4%, more money wants to sit in safe deposits instead of taking risk by buying stocks. In effect, the bar for how much more stocks must earn than deposits goes up. Conversely, when rates rise, some sectors benefit, such as banks and insurers that earn more interest (Lesson 18). You can see how the current rate trend affects each sector on the "Rates ↑" row of the Macro Map.

Not always. When rates rise because the economy is very strong, earnings growth can outweigh the interest burden, and stock prices may rise too. You have to look at "why" rates are rising and how fast.