Interest
What Is Interest?
Interest is the cost of borrowing money or the return earned on deposited funds.
When you borrow, interest is the amount paid to the lender in addition to the original loan amount, known as principal. When you save or invest, interest represents earnings on your deposited balance.
Interest is typically expressed as a percentage rate, such as an annual percentage rate or annual percentage yield.
It applies to loans, credit cards, mortgages, savings accounts, bonds, and other financial products.
Why It Matters
Interest directly affects:
- Monthly loan payments
- Total repayment cost
- Savings growth
- Investment returns
Higher interest rates increase borrowing costs. Lower rates reduce them. Over time, even small rate differences can significantly change total cost or earnings.
Understanding interest helps borrowers compare loan offers and helps savers evaluate returns.
How Interest Works
Interest accrues based on the principal balance and the applicable rate over a defined period.
In lending, interest may accrue daily, monthly, or annually depending on the agreement. In savings products, interest compounds according to the institution’s calculation method.
The total interest paid or earned depends on the rate, time, and compounding structure.
Interest vs. APR
Interest → The rate charged or earned
APR → The broader measure including fees and borrowing costs
APR provides a more comprehensive cost comparison.
FAQs About Interest
Is interest always calculated annually?
Interest rates are often expressed annually, but accrual may occur daily or monthly.
Can interest rates change?
Variable-rate products adjust based on market benchmarks.
Does paying early reduce interest?
In most amortized or simple interest loans, early principal payments reduce future interest costs.
Related Terms
