What is Interest?


Interest is the fee paid by a borrower to a lender for using their money

Interest is usually expressed as a percentage of the amount borrowed/lent (i.e. the annual interest rate).
It helps to think of loans and savings composed of 2 parts:

  • The original amount borrowed or deposited – known as the ‘principal’
  • The interest accrued since the start of the loan or savings account

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For the borrower

Interest is the cost you pay for using the money.

When you take out a loan, you will pay back:

  • The principal amount you borrowed
  • The cost of borrowing the money  (i.e. interest accrued since you took out the loan)
  • Any additional charges for financing the debt  (e.g. administration fees)


For the lender

Interest is the income you earn from lending the money.

As a saver, or when your bank account is in credit

You earn interest from leaving money in your account – in effect, you ‘lend’ this money to the bank and they pay you interest for using it.

You will get back:

  • The principal amount you deposited
  • Income from ‘lending’ (i.e. interest accrued since you opened the savings or bank account)


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