Interest
The price of using someone else’s money: what borrowers pay lenders, and what savers earn on deposits and bonds.
What it means
Interest is the cost of borrowing or the reward for lending. When you take a loan or carry a credit card balance, you pay interest on the amount owed. When you deposit money in a bank or buy a bond, you are effectively lending, and you earn interest.
Interest is usually stated as an annual percentage of the principal. How much you actually pay or earn depends on the rate, the balance, the length of time and how often interest is compounded. Lenders charge more when they see more risk, which is why credit scores, collateral and loan length all affect rates.
Example
Suppose you borrow $1,000 at 10% annual interest and repay it in one lump sum after a year. You would owe $1,000 of principal plus $100 of interest, or $1,100.
How it’s used
- Comparing loans, credit cards and savings accounts
- Estimating the total cost of a mortgage or car loan
- Understanding how savings and bonds grow
Related terms
Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.