Interest is the cost of borrowing money, typically expressed as a percentage of the amount borrowed. It is the fee that a lender charges a borrower for the use of their money. The interest rate is the percentage of the loan amount that is charged as interest.
When a borrower takes out a loan, they agree to pay back the original amount borrowed, known as the principal, plus an additional amount, which is the interest. The interest is calculated based on the interest rate and the length of time the money is borrowed for.
Interest can be simple interest or compound interest. Simple interest is calculated only on the principal amount and it is paid only on the original amount borrowed. Compound interest is calculated on the principal and all accumulated interest. It is more commonly used in loans and savings accounts, and it generates more interest over time.
Interest is a key consideration when taking out a loan, as it can significantly increase the total cost of borrowing over time. Borrowers should carefully consider the interest rate and other terms of a loan before taking it out to ensure that they can afford the payments.