Interest
Learn more about common financial terms here.
Need more help? Our team is ready.
Interest
What is Interest?
Interest is the price paid for borrowing money or the amount generated by lending money or investing. In situations where a firm or individual borrows money, interest is the extra cost charged as compensation for the use of the money. When one deposits his/her money in interest-bearing accounts or investments, the amount of money generated constitutes interest.
Interest is normally expressed in terms of percentages of the principal amount borrowed and is associated with loans, credit card debt, bonds, among others.
How Do You Calculate Interest?
Here is the simple formula to calculate interest
| Simple Interest=Principal×Interest Rate×Time |
- Principal: The original amount borrowed or invested.
- Interest rate: The percentage charged or earned on the principal.
- Time: How long the money remains borrowed or invested.
Example: $10,000 borrowed at 5% simple annual interest for 3 years:
Interest = $10,000 × 0.05 × 3 = $1,500
What is Total Interest?
Total Interest is the complete amount in dollars for the entire period of the loan or an investment, unlike the interest rate, which is only expressed in terms of a percentage. It is the figure that indicates how much it would really cost to borrow money.
| Total Interest=Total of All Payments−Principal |
- Loan amount (principal): $20,000
- Interest rate: 3.5% per year
- Term: 5 years (60 monthly payments)
- Monthly payment (calculated using the loan amortization formula): ≈ $363.99
- Total paid over 5 years: $363.99 × 60 = $21,839.40
- Total interest paid: $21,839.40 − $20,000 = $1,839.40
Total interest is especially useful for comparing loan offers: two loans can have similar rates but very different total interest costs depending on the term length, payment frequency, and whether interest is front-loaded (as with most amortized loans).
Want Help With Your Finance and Business Operations?
Atidiv helps growing businesses streamline finance and accounting processes with reliable, technology-enabled solutions designed around their unique needs. With expertise in accounting support, financial reporting, back-office management, and process improvement, our professional team can help you achieve greater precision and efficiency across your business’s financial operations.
If you need assistance with simplifying accounting, improving your financial processes, or scaling your operations, Atidiv can help. Contact our team to see how we can help you with our finance and accounting services.