There are times when people, businesses, and governments want to spend more money than they have. That is when they borrow it. Now, why would anyone be willing to loan their money to someone else? The basic reason people and banks are willing to lend money is that they can collect interest on this money. This interest is the amount charged for the use of money.
There are several different types of interest.
The prime interest rate is the amount that banks charge their most credit-worthy customers. It is the Fed Funds Rate plus an amount determined by the bank. This amount is usually three percentage points above the Fed Funds Rate. This Fed Funds Rate is the interest that banks charge each other. It is based on the Federal Open Market Committee's (FOMC) target for the Federal Funds Rate. This is one way the Federal government can regulate the economy.