Interest is both the cost of borrowing funds and the profit that accrues to those who deposit funds in a savings account. Calculated as a percentage of the loan or deposit balance, interest is paid to the lender by the borrower in the case of a loan or from the financial institution to the depositor in the case of a savings account.

Interest refers to two related but very distinct concepts: either the amount a borrower pays the bank for the cost of lending or the amount an account holder receives for the favor of leaving money with the bank.

There are two basic kinds of interest: simple interest and compound interest. Simple interest, or flat-rate interest, is calculated as a percentage of a deposit or loan’s principal balance. No matter how long a borrower goes without paying a debt or an account holder keeps money in the bank, interest will still be calculated from the original amount.

All loans incur interest. With mortgages, for instance, interest payments are rolled into the monthly payment. When the terms of the loan are negotiated, the parties can agree to a specific life span for the debt instrument: a 15-year mortgage, for instance. Interest on loans is often expressed as an annual percentage rate, or APR, which takes into account other administrative fees.

However, not all depository accounts accrue interest. With few exceptions, checking accounts, for example, never accrue interest, and basic savings accounts accrue interest at such low rates that many investors have chosen to put their money in more profitable instruments.