An interest rate refers to a rate which is charged or paid for the use of money. Interest rates differ from loan to loan. Basically, an interest rate is expressed as an annual percentage of the principal. Before you consider a loan for any purpose, it is important to take the interest rates into account. Different banks or other organizations use to calculate interest rates differently with different methods. Each method used determines different amount of interest you pay. Understanding how to calculate interest rates can help you better understand you loan contract and to make informed decisions.