Interest
The cost of borrowing money, expressed as a percentage of the principal over time.
What is Interest?
Interest is the charge paid by a borrower to a lender for the use of money, typically expressed as an annual percentage rate (APR). From the lender's perspective, interest is the return earned for providing funds and accepting credit risk. Interest can be simple — calculated only on the original principal — or compound, where interest accrues on both the principal and previously earned interest. The level of interest rates in an economy is primarily determined by central bank policy, inflation expectations, and the creditworthiness of the borrower.
Example
If you borrow $10,000 at a 6% annual interest rate, simple interest costs $600 per year. With compound interest (compounded monthly), the effective annual cost is approximately 6.17% — the difference compounds over time and can add up significantly over multi-year loans like mortgages or student debt.