When money is borrowed, interest is charged for the use of that money for a
certain period of time. When the money is paid back, the principal (amount of
money that was borrowed) and the interest is paid back. The amount to interest
depends on the interest rate, the amount of money borrowed (principal) and the
length of time that the money is borrowed.
The formula for finding simple interest is: Interest = Principal * Rate * Time.
If $100 was borrowed for 2 years at a 10% interest rate, the interest would be
$100*10/100*2 = $20. The total amount that would be due would be $100+$20=$120.
Simple interest is generally charged for borrowing money for short periods of
time. Compound interest is similar but the total amount due at the end of each
period is calculated and further interest is charged against both the original
principal but also the interest that was earned during that period.
