What Is Interest?

What Is Interest?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

Interest refers to the cost of borrowing money or the return on investment (ROI) for a lender or investor. It is calculated as a percentage of the principal amount (the loan or investment amount). Typically interest accumulates over time, allowing the total sum to grow.

For instance, if you take out a loan, the cost you pay to borrow that money is interest. Similarly, if you deposit money in a savings account, the return you earn on that deposit is also considered interest. The interest rate can be fixed (always stays the same) or variable (changes with market conditions).

Related Questions

1. What is Principal Amount?

The principal amount is the original sum of money borrowed in a loan, or invested, on which interest is calculated.

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2. What are Fixed and Variable Interest Rates?

Fixed interest rate stays the same for the duration of the loan term. Variable interest rate, on the other hand, changes depending on market conditions.

3. How is interest calculated in simple terms?

Simple interest is calculated by multiplying the principal amount, interest rate, and the time the money is borrowed or invested for. The formula is I=PRT, where I is the interest, P is the principle, R is the rate, and T is time.

4. What is compound interest?

Compound interest is interest on a loan or deposit calculated on both the initial principal and the accumulated interest from previous periods. It makes a sum grow at a faster rate than simple interest, which is calculated only on the principal amount.

5. What is APR (Annual Percentage Rate)?

APR is the yearly interest rate charged on a loan including any fees or additional costs associated with it. It gives a clear picture of the true cost of borrowing.