Credit is money granted by a creditor or lender to a debtor or borrower, who defers payment of the debt. In exchange for the credit, the lender gets back the money, usually paid on a monthly basis, plus interest. Since a creditor pays out money today in exchange for a repayment of it in the future, the creditor loses the time value of that money. In order that creditors make credit available, they are allowed to charge interest, often referred to as a finance charge. 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.