Interest
The price you pay to borrow money, expressed as a percentage of the unpaid balance. On most loans, interest accrues daily on whatever you still owe.
Reviewed May 2026.
Interest is what the lender charges you for letting you use their money. The amount you pay in interest depends on three things: how much you owe (principal), the rate (APR), and how long you owe it (term).
On a typical amortizing loan, interest is calculated on the remaining balance each month. So as you pay down principal, the interest portion of each future payment shrinks. This is why the same monthly payment is mostly interest at the start of the loan and mostly principal at the end.
Interest and APR aren't the same thing. The interest rate is just the cost of borrowing. APR adds in origination fees and certain other charges, so it's always equal to or higher than the interest rate. APR is the number that matters for comparing loans across lenders.
On credit cards and HELOCs, interest is calculated daily on the average balance during the billing cycle. On personal loans, mortgages, and auto loans, it's typically calculated monthly on the balance at the start of each month. The math is similar but the timing of payments matters more on revolving products.
PayoffMath angle. Interest is the thing every prepayment decision is trying to eliminate. A dollar of extra principal cancels every future month of interest that dollar would have accrued, which is why early extras matter so much more than late ones — the same dollar erases more remaining months of charges.
Why it matters. The lender quotes you a rate; what you actually pay is the rate applied to whatever balance is still outstanding each month. Knowing where you are on that curve is the difference between thinking 'my payment is mostly interest' and verifying it on the schedule.
Common mistake. Confusing the interest rate with APR. The rate alone is the cost of borrowing; APR adds the origination fee and other folded-in costs, so it's the only fair number for comparing one loan offer against another.
Try the effective apr calculator → — see exactly how the headline rate, the origination fee, and any prepayment penalty combine into the real cost of the loan.
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Sources and review
Reviewed May 2026. Glossary entries are plain-language definitions, not legal definitions. For account-specific rules, your loan documents control.
Definition by James L. Wu. Plain-language gloss, not a legal definition. For terms that show up in your loan paperwork, the governing language is in your loan documents. See the editorial policy for sourcing.