Interest on Principal Money makes money, that's what lending does. There are typically two kinds of interests - simple interest and compound interest. Scroll down to Continuous Compound Interest to skip the brief introduction Simple Interest A fixed amount (principal) is loaned and a fixed payment is made for keeping that amount of money (simple interest). The accumulation of simple interest is a linear function of the time taken to return the principal. I = Interest p = Principal r = rate of interest (per annum) n = number of years I = p * r * n Here, the principal and rate of interest are constant and interest is a linear function of time. Compound Interest The simple interest does not vary with time. It does not take into account the effects of inflation. In time, continuing to pay the interest will be much cheaper than repaying the principal. Taking a 5000 dollars loan and paying an interest of 1% (50 dollars) every year for 50 years since 2000 might...