Interest is the cost of borrowing money. It is also the return on savings. When you take out a loan, you pay interest. When you deposit money in a bank, you earn interest. The same concept works in both directions. Interest is the price of time. It compensates the lender for waiting and for the risk that the borrower does not repay.

Interest appears everywhere. Credit cards charge it on unpaid balances, often at rates above 20 percent. Mortgages charge it over decades, but at lower rates because the loan is secured by the home. Savings accounts pay a small amount. Bonds pay interest through coupon payments. Each rate reflects risk, duration, and market conditions.

Simple interest is calculated only on the principal. Compound interest is calculated on both principal and accumulated interest. That difference is small in the first year and enormous over decades. A $10,000 loan at 5 percent simple interest costs $500 per year. With compounding, the cost grows each year. Understanding the difference helps borrowers and savers alike. Interest is not complicated. It is just powerful.

Common types

• Simple interest
• Compound interest
• Fixed and variable rates
• Annual percentage rate
• Annual percentage yield