Interest Definition

The word interest has dozens of possible meanings, but in the realm of finance it almost always means a charge for a loan. Most interest is calculated as a percentage of the loan principal and interest usually accrues on a periodic basis-typically monthly. If you take out a loan to buy an automobile, for example, you can expect to pay some percentage of interest above the amount of the loan.

On the other hand, if you maintain a savings account you receive a periodic interest payment on the amount (in effect, you are loaning money to the bank). Some states and municipalities have so-called usury laws-that is, laws governing the amount of interest that can be charged in various circumstances. When comparing two equivalent loans, usually the loan with the lower interest rate should be selected.