The term **interest** refers to a fee that is charged by a lending institution for a borrowed sum of money.
The interest is typically expressed in the form of annual percentage of the principal.
The justification behind interest is that the lender should be compensated for missing out on other investments that may be made with the issued loan. Here,
opportunity cost stands for the next best alternative as a result of the investment choices. In brief, the
foregone investment option represents opportunity cost for the lending institution.

Consumer goods, money, and shares may be lent for a corresponding interest. In general terms, the amount of the
borrowed sum is referred to as the principal. The fee, in the form of percentage of the principal, is called
interest rate. Several types of interest can be differentiated. Simple interest is computed over the original
principal or the amount which remains due. The calculation of the following periods does not include accrued
interest from past periods. Two possible complications appear with offers
that involve simple interest. Firstly, the time value of money renders comparison difficult, if one looks at two
identical rates at different time periods. Secondly, the unpaid interest turns into interest payable. In this
case, it transforms from simple interest into compound interest. The latter should be calculated on the original
principal for each period, including interest accrued during past periods. The interest may be specified as an
annual rate. However under the compound interest, the borrower is required to pay interest on the previous
interest.

Furthermore, credits typically include other types of payments such as charges and fees. The annual percentage
rate covers the yearly interest rate, including any fees and other expenses. Finally, some loans include
unchangeable interest rate referred to as fixed interest rate. Other loans are based on a reference rate which
remains outside the control of the lender and the borrower. Such changeable rates are known as floating rates.

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