Basics

Interest is money a person or establishment receives for lending money.  You will see the term "Interest" and "Interest Rates" everywhere.  You might see advertised interest rates by a savings bank telling you how much you can earn by putting your money in the bank.  The bank may also quote an interest rate for a car loan, a house loan, or quote a rate on a bond.

When a borrower receives money, let’s say from a bank, he or she agrees to pay a certain percentage, generally calculated annually, to the lender for the use of the money.  The borrower and lender also agree on a payment schedule for the money to be returned and penalties that will occur if a borrower fails to meet the agreed payment schedule.  Here are two principal types of interest—Simple Interest and Compound interest—which I have explained below.  I’ve also included a formula, the Rule of 72, which quickly shows you how long it will take for you to double your money based on the interest you will pay when you borrow money.