Interest

Interest is the amount of money paid (or received) in excess of the amount borrowed (or lent). If you are a borrower, you pay interest to the lender. If you are a lender, you receive interest from the borrower.

Simple interest

To compute simple interest you multiply the money borrowed or lent by the interest rate (e.g., $1,000 * 10% = $100 interest).

Compound interest

Often any interest that has yet to be paid by the borrower to the lender is added to the original amount of the loan. The interest paid by a borrower in this type of loan is called compound interest.

Annual rates

Most loans state their interest rates on an annual basis (called an annual rate).

Effective interest rate

If interest compounds more than once a year, interest earned or payable will be larger than the stated rate.