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Definition of Interest

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Interest is the payment or charge that a debtor pays a creditor for the use of money over a given time period.

Interest may be calculated any number of ways. Interest is usually calculated from the main principal of the loan. It may be compounded annually or daily or any other number of ways. The interest rate may be fixed over the entire time of the loan or may be adjusted based on the prime rate or other metrics.

A simple way to think of interest is the rent paid to use the money for a time. At the end of that time the money must be given back.

There is both compound interest and simple interest. Simple interest is just a rate of interest that is paid on the principal over the specified time period. Compound interest is where interest is paid not only on the principal, but also on interest that was previously accrued.

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