An interest rate is calculated as a percentage of the principal that is charged on a daily, monthly or annual basis. Higher rates will apply to a borrower that is considered a higher risk of defaulting on a loan, while lower rates are charged for lower risk clients.
Two calculations for interest rates are most common. A simple interest rate is the principal amount borrowed multiplied by the annual interest rate multiplied by the number of years the loan is outstanding. A compound interest rate additionally takes into account accrued interest from the previous months. There is not much difference between the two calculations for short periods, but the disparity between them increases over time.
A fixed or variable interest rate can apply to debt. A fixed interest rate (such as applicable to credit card debt) remains fixed for the entire term. A variable rate fluctuates according to changes in a benchmark interest or index, such as the Bank of Canada interest rate.