When you borrow money to buy a car or a house you are not only expected to pay back that money, but to pay interest on it, too. Interest is a fee paid by a borrower to the lender for the use of money. It is calculated as a percentage of the loan amount. When you deposit money into a savings account or certificate of deposit or buy a savings bond, you are loaning money and so you are paid interest. Interest plays an important role in economics because it serves as an incentive for those with available money to lend it to those needing it. There are many different ways that this fee is expressed and calculated.

Types of Interest

The term "simple interest" refers to a percentage of the loan that must be paid back in addition to the original loan. For example, if you borrow...