What is meant by Interest?

Interest is the cost of using the money of others. You pay interest when you borrow money (loan). You earn interest when you lend money (deposit).

Interest is the additional money that is necessary to pay to get money from someone. So, what does it cost to borrow money? The answer is more money.

It is expressed in terms of percentage of a loan or deposit and it is generally quoted annually.

There are two types of interest: simple and compound interest.

Simple interest: It is calculated on the principal amount at a flat rate basis. The principal is fixed over a period of time and interest is charged on that fixed amount till the end of the tenure.

Compound interest: In this type of interest calculation, the rate of interest is charged on the amount, which is the sum of principal and accrued interest. In simple words, it is the addition of interest to the principal amount. You can also look at it as an interest on interest.