How Interest Rates Work

Interest is the price of money. When you borrow, it is what you pay the lender; when you save, it is what the bank pays you. The rate is usually quoted per year, but how it actually behaves depends on where it is applied. Here is how it works in the places you meet it most.

The two flavours: simple and compound

Simple interest is charged only on the original amount. Compound interest is charged on the original amount plus interest already added, so it grows faster over time. Most savings and long-term debt compound; some short-term loans use simple interest.

How interest works on savings

Your balance earns interest, and that interest then earns interest of its own. The more often it compounds (daily beats monthly beats yearly) and the longer you leave it, the more you end up with. See it in action with the Compound Interest Calculator.

How interest works on a loan

On a normal loan you pay a fixed amount each month. Early payments are mostly interest because the balance is large; later ones are mostly principal. A shorter term means higher payments but far less total interest. Try the Loan Calculator.

How interest works on a credit card

Cards are the most expensive because the rate is high and interest is charged on the remaining balance every month. If you only pay the minimum, most of it goes to interest and the balance barely moves. The Credit Card Payoff Calculator shows how much faster a higher payment clears it.

How interest works on a mortgage and car loan

Both work like an amortising loan: a big balance repaid over years, with interest front-loaded. Even a small difference in rate moves the total by thousands. Use the Mortgage Calculator or Car Loan Calculator to compare.

APR vs APY: read the right number

APR is usually the plain yearly rate. APY includes the effect of compounding, so it is a little higher. Savings accounts often advertise APY (it looks bigger); loans often quote APR (it looks smaller). Always compare like with like.