Interest
The cost of borrowing money, or the earnings paid on savings, calculated as a percentage of the balance.
What does interest mean?
On a loan, interest is what you pay the lender for the use of their money; on savings, it’s what you earn. It’s charged on the outstanding balance, which is why reducing the balance faster lowers the interest you pay.
Put it to use
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Related terms
Interest — frequently asked
How is interest on a loan calculated?
Each period the lender multiplies your outstanding balance by the periodic rate (annual rate ÷ periods per year). On a $10,000 balance at 6% annual, one month’s interest is about $50. As you repay principal, the interest portion shrinks.
What is the difference between simple and compound interest?
Simple interest is charged only on the original principal; compound interest is charged on the principal plus previously accrued interest. Loans and savings that compound grow faster than simple-interest equivalents over time.