Compound interest, on the other hand, is a bit more complicated—it compounds, or recalculates, your repayment based on monthly payments. When you repay a loan, you may wind up paying interest on interest in the end, and compound interest takes that into account.

Whichever formula you use to calculate your interest rate, the idea is the same. Your interest rate is the basic percentage of what you’ve borrowed that you’re paying back to the lender.