Learn · Mortgage & Home
What Is Interest? Types of Interest, Explained
The cost of borrowing money — and the return for lending it — broken down without the jargon.
What interest actually is
Interest is the price of money over time. When you borrow — a mortgage, a car loan, a credit card balance — the lender charges interest as the cost of letting you use their money now instead of later. When you save or invest, the roles flip: a bank or bond issuer pays you interest as the cost of using your money.
Interest is almost always expressed as a rate: a percentage of the amount borrowed or saved (the principal), applied over a period of time, usually a year.
Simple interest vs. compound interest
Simple interest is calculated only on the original principal, for the whole term. A $10,000 loan at 5% simple interest costs $500 per year, every year, regardless of how much you've already paid.
Compound interest is calculated on the principal plus any interest already added. That $10,000 at 5% compounded annually owes $500 in year one, but in year two it's 5% of $10,500 — $525 — because the first year's interest gets folded into the balance. Compounding can happen annually, monthly, or even daily; the more frequently it compounds, the faster a balance grows (or a debt does, if you're the one paying it).
Most mortgages, auto loans, and credit cards use compound interest. It's why paying down high-interest debt early saves more than the sticker rate suggests — every dollar of principal you remove stops compounding against you.
Fixed rate vs. variable rate
A fixed rate stays the same for the life of the loan — your payment doesn't change because of market rate movements. A variable (or adjustable) rate is tied to a benchmark index and can rise or fall on a schedule set by the loan terms. Fixed rates offer predictability; variable rates often start lower but carry the risk of increasing later.
Interest rate vs. APR
The interest rate is the cost of borrowing the principal, full stop. The APR (Annual Percentage Rate) rolls the interest rate together with most lender fees and closing costs into a single annual percentage — it's meant to be the more complete number for comparing loans from different lenders, since two loans with the same interest rate can have very different APRs depending on fees.
Where this shows up
Interest is the core variable behind every calculator in our Mortgage & Home section — it's the single biggest lever on what a loan actually costs you over its lifetime, usually more than the size of the loan itself once you look at total interest paid over 15 or 30 years.