When you take a loan from any financial institution, you have to pay back the amount that you borrowed with an interest. The interest amount to be paid depends on the interest rate and the duration of the repayment period.

**What Is Interest?**

Interest is the amount of money you have to pay back over and above the principal amount borrowed. This is the way through which lenders make a profit.

**What Is the Principal Amount?**

The amount which you borrow is the Principal Amount.

**Interest Rate**

An **interest rate** is the percentage of principal charged by the lender for the use of its money.

**How To Calculate Loan Interest **

### Example:

Omwami borrowed a loan amounting to $400 from a financial institution that he was to pay back at an interest rate of 5%. Calculate the amount he was to pay back as interest.

Therefore, the interest to be paid is $20.