---
title: "Interest: definition | Desert Rock Capital"
url: "https://www.desertrockcapital.com/glossary/interest"
description: "Interest is the cost of borrowing money, charged by the lender as a percentage of the amount owed. It is the amount paid on top of repaying the principal."
---

Loan costs

# Interest
All lending terms
Definition

Interest is the cost of borrowing money, charged by the lender as a percentage of the amount owed. It is the amount paid on top of repaying the principal.

Interest is what a lender charges for the use of borrowed money, expressed as a rate applied to the outstanding balance. On an installment loan, interest is built into each scheduled payment alongside principal, and because interest is generally calculated on the remaining balance, the interest share of each payment tends to decline as the loan is paid down. Interest can be charged at a fixed rate that stays the same or a variable rate that can change over time. The interest rate is distinct from the annual percentage rate (APR), which also reflects certain required fees. Paying a loan off ahead of schedule can reduce the total interest, depending on how interest accrues and whether a prepayment penalty applies.

Source: [Consumer Financial Protection Bureau](https://www.consumerfinance.gov/ask-cfpb/what-is-the-difference-between-a-loans-interest-rate-and-its-apr-en-733/). This definition is general educational information, not legal or financial advice.
Related

- [Personal loans](/services/personal-loans)
- [Loan FAQs](/faqs)
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