Loan Interest Explained Simply

When you borrow money, you don't just pay back the borrowed amount (the principal); you also pay a fee for borrowing it. This fee is the interest.

Simple vs. Compound Interest

• Simple Interest is calculated only on the principal amount of a loan.
• Compound Interest is calculated on the principal amount AND also on the accumulated interest of previous periods.

Most modern mortgages and personal loans use a form of amortizing interest that reduces over time as you pay down the principal.

How to Reduce Interest Paid

1. Opt for a shorter loan term.
2. Make extra principal payments.
3. Shop around for lower interest rates.

Curious about how much interest you'll pay over the life of your loan? Try our Loan Interest Calculator.