Interest on credit can be either simple or compound. Simple interest is interest charged only on the principal amount borrowed. Simple interest does not add the interest charge back to the outstanding loan during the length of the loan. Thus, simple interest charges are less than compound interest charges. Compound interest is interest charged not only on the principal, but on the interest accrued during the length of the loan.
Compound interest is more expensive to the debtor, because interest is charged on interest.
The amount of interest that can be charged is regulated by state usury laws. The percentage interest rate allowed varies form state to state, depending on the type of credit being extended. Credit is extended pursuant to a written contract. The written contract sets forth the respective rights and responsibilities of the creditor and the debtor. Credit can be used by both businesses and individuals.