Instead of keeping or spending their surplus funds, lenders use it to generate more income through interest. Smart consumers should learn as much as they can about the interest rates that they agree to pay. Some merchants may try to make a profit by selling items at low prices but charging a high interest rates on credit payments. Many times consumers pay a higher interest rate for credit from a store than they would for a loan from a bank. The type of interest paid on loans is usually simple interest.
Simple interest is paid only on the principal, the amount of money that is borrowed.
Most mortgages and other consumer installment loans are amortized. An amortized loan is any loan with at least some portion of the payments going towards the principal. In a typical fully amortized loan, the debt is completely paid off by equal periodic payments over a fixed period of time. There are a number of loan markets, including those for home mortgages, consumer loans, government bonds, corporate bonds and foreign loans. Each loan market has its own interest rate, which rises and falls over time.