Interest is the price a lender charges for letting you use its money until you've paid it back in full. It's charged as a percentage of the amount you borrowed, which is called the principal.
Lenders calculate interest on a set schedule, usually daily or monthly, and they add it to your balance. That means the total amount you owe can keep climbing, even while you're making payments.
How much interest you pay depends on three factors: your rate, the balance of your loan, and your repayment timeline.
When you're borrowing money, the interest rate and timeline will determine how much more you'll have to pay on top of the balance. A higher interest rate means higher costs. A longer timeline can mean paying more interest.
Simple Interest vs. Compound Interest
The two main types of interest are simple and compound. A lender calculates simple interest only on the principal. Compound interest is calculated on the principal, plus any interest that accrues. In other words, compound interest includes interest on interest and can make your debt grow faster the longer it sits unpaid.
Say you borrow $10,000 at a simple 10% annual interest rate where the principal and interest are due in a lump sum in three years. The lender adds 10%, or $1,000, of the principal each year. At the end of three years, you owe $13,000: your $10,000 principle plus $3,000 in interest.
Take the same loan with the same terms, except the lender compounds the interest annually. After the first year, your balance has grown to $11,000, just like a simple interest loan.
But after the second year, your balance has grown to $12,100 because the interest is based on the $11,000 figure, not the original principle of $10,000. After three years, when your loan is due, you now owe the lender $13,310.
That $310 difference between the first loan and the second is the interest on interest that comes from compounding. If a lender compounds it more frequently—quarterly, monthly or weekly—it can climb even higher.
The Difference Between and APR and Interest Rates
An interest rate tells you how much the lender is charging you to borrow money, but the annual percentage rate, or APR, includes the interest rate plus any fees or loan costs the lender is charging you. It gives a clearer picture of how much you'll actually pay.
APRs can fall into one of two categories: fixed and variable. Fixed APRs stay the same through the entire term of your loan. Federal student loans, mortgages and car loans generally come with fixed APRs.
Variable APRs are tied to a broader market index and are likely to change with economic conditions. Most APRs on credit cards are variable. The APR on U.S. credit card accounts that carry a balance ran more than 20% in the second quarter of 2026, according to data from the Federal Reserve.
How Interest Applies to Different Kinds of Debt
Credit cards typically compound interest daily against a revolving balance, which is the unpaid money on your account that "revolves" or carries over to the next month. There's no fixed payment schedule, but you do have to pay a minimum each month. Paying only that minimum, however, can stretch a $3,000 balance into years of payments and thousands of dollars in extra interest.
Mortgages use an amortization schedule. Your early payments go mostly toward simple interest, and your later payments go mostly toward principal, while your total monthly payment stays the same for the life of your loan.
Auto loans generally use an amortization schedule as well. You make the same payments each month, and a larger share of your early payments goes toward simple interest before paying the principal.
How to Prioritize Paying Your Debts
A strategy known to work is the "debt avalanche method." You start by making a list of all your debts from the highest to lowest interest rate. Chances are your credit cards will top the list.
You then pay as much as you can on the highest debt, while making the minimum payment within the lowest-interest debts. Once you've paid off the top debt, prioritize the next one down on your list, and repeat the process until you're debt-free.
Because the debt avalanche method targets high-interest debts first, you pay less debt over time. It also reduces the amount of time it takes to become debt-free. The method does take patience and discipline, though, so be prepared to stick to your plan.
