The interest rate is the fee for using money, expressed in annual percentage terms. The interest rate is determined by the supply and demand for money. The demand for money comes from those with a shortage of funds, borrowers or investors. The supply of money comes from those with a surplus of funds, lenders or savers. The interest rate is determined by the equilibrium of money supply and money demand. 
Market interest rates are nominal interest rates, interest rates unadjusted for inflation. A nominal interest rate can be divided into two components: the increase in purchasing power the lenders demands for the use of her money (the real interest rate) and the expected rate of inflation. Since inflation reduces the purchasing power of money, lenders will build the expected inflation rate into the interest rate they charge borrowers in order to protect themselves from the loss of purchasing power. So, the nominal interest rate equals the real interest rate plus the expected inflation rate. Real interest rates can actually turn out to be negative. This is like paying someone to borrow your money. Suppose the interest rate you receive on your savings account is 1%. Then, the nominal interest rate is 1%. Inflation is likely to be 2.5% this year, so the real interest rate on your savings account is -1.5%.
