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Interest

Definition of 'Interest'

In credit terms, interest is the cost of borrowing money.

Interest is calculated as a percentage of the current balance and is charged on a monthly, quarterly or annual basis as set out in a credit agreement.

Interest can be expressed as an annual rate, as a monthly rate, or as a daily rate. When comparing interest rates, the annual rate of interest is usually used as a benchmark.

Interest can be calculated on a simple basis or on a compound basis.

A simple rate of interest means that the interest charged is the product of the balance, the interest rate and the time the borrowing has been outstanding.

A compound interest rate calculates the interest due at the end of a period (usually monthly or quarterly) and then adds it to the debt, so that interest is then calculated on the original debt plus interest. The process of compounding interest at regular periods is known as capitalisation. Capitalised interest is the sum of all interest compounded within the amount now due.

Interest rates can be fixed, either permanently or for a fixed period, or can be varied by the lender.

From a lender’s perspective, interest is a reflection of the risk taken on – so the higher the perceived risk of a borrower, the higher the interest rate charged.

Use the links below to locate the term you are looking for. If you can't locate it, please get in touch.

Credit Jargon Starting 'G'

Credit Jargon Starting 'I'

Credit Jargon Starting 'J'

Credit Jargon Starting 'L'

Credit Jargon Starting 'M'

Credit Jargon Starting 'S'

Credit Jargon Starting 'T'

Credit Jargon Starting 'V'

Credit Jargon Starting 'W'

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