<ol><li>maximum loan interest rate permitted by state law. An interest rate in excess of the legal rate is considered USURY; the penalties for charging excessive interest may include stiff fines or forfeiture of interest and/or principal.</li><li>rate of interest set by state law for legally enforceable claims, such as legal judgments and overdue taxes. This rate is rarely the highest rate allowed by law for any debt.</li></ol>

finance charges computed by adding the interest payable to the full amount of loan principal. The add-on interest is added to the original principal amount, and becomes a part of the face amount of the promissory note.

Computing interest due under the add-on interest method is fairly simple. The loan principal is divided into a number of fixed payments, and each payment is multiplied by the finance charge, to calculate the interest cost to the borrower: Add-On Interest = Principal × Rate × Number of Months in the loan/12.

computations based only on the original principal. compound interest is applied to the original principal and accumulated interest. For example, $100 deposited in a savings account at 10% simple interest would yield the interest of $10 per year (10% of $100).

interest earned from date of deposit to date of withdrawal. Also, deposit account interest compounded daily and credited to the depositor's account monthly, quarterly, or at other intervals. For example, $100 deposited for a year (365 days) earns $.84 in daily compound interest at 30 days, $2.53 at 90 days, $5.13 at 180 days, and $10.67 after a full year.

1. difference between the face value(i.e., future value) and the present valueof a payment.
2. reduction in price given for prompt payment.See also sales discount; trade discount.
3. excess of the par value (face value) of a financial instrument over the price paid for it. See also bond discount.

finance charge on consumer installment loans that is computed in advance, and added to the outstanding balance owed by the borrower. The basis of interest calculation is usually the add-on interest method. Contrast with simple interest.

interest rate charged by banks to their most financially sound customers. The prime rate is a reference point for other interest rates-some are lower than the published prime, most are higher. For example, the interest rate on commercial paper is less than the prime interest rate. Most companies have to borrow from financial institutions at a rate in excess of the prime rate. The rate is influenced by the cost of funds to the bank and the rates borrowers will accept.

interest paid by a bank or other financial institution and calculated on a 365-days-per-year basis, as opposed to a 360-day basis, called ordinary interest. The difference-the ratio is 1.0139-can be material when calculating daily interest on large sums of money.

charging loan interest higher than the rates allowed by law. Interest rates in consumer credit contracts are controlled by state law, and the highest permitted rate is called the usury rate or the usury ceiling. Since the early 1980s, many state legislatures relaxed statutory controls on consumer credit because rather than protecting consumers from unscrupulous lenders, such controls often make it more difficult for consumers to obtain credit. To alleviate this, and to keep banks from moving their credit card operations to states with more liberal statutes, lawmakers revised state statutes to allow interest rates to be set by market competition, rather than specified by laws. Several states have abolished usury ceilings; most states have raised the interest ceilings to encourage more rate competition among financial institutions, and most of these laws have a sunset clause calling for periodic review every three to five years. Some states, including New York, Delaware, and South Dakota have no limits on consumer credit. New York does, however, have a criminal usury ceiling of 25%, a maximum rate of interest that lenders may charge on consumer credit.

State usury laws generally are enforceable only through civil suits filed by debtors claiming excessive interest charges. Most state laws have stiff penalties for illegal interest, ranging from forfeiture of interest owed on the entire loan balance, or forfeiture of both principal and interest. Commercial credit in most states is exempt from usury statutes; agricultural credit is unregulated, though not exempt from state interest rate controls.

rate that is applicable when interest in subsequent periods is earned not only on the original principal but also on the accumulated interest of prior periods. For example, assume that the initial principal is $1000 and annual interest rate is 10%. At the end of first year, the amount is the principal and interest, which is $1000 + .1($1000) = $1000 + $100 = $1100. At the end of second year, the amount is accumulated: $1100 + .1($1100) = $1100 + $110 = $1210.

mathematical formula used in computing the interest rebated when a borrower pays off a loan before maturity. The Rule of 78's, also known as the Sum of the Digits, is applied mostly to consumer loans in which the finance charges were computed using the add-on interest or discounted interest method of interest calculation.

The formula for calculating rebates works as follows: add up the number of months for which payments are scheduled; in a 12-month installment loan, the total is 78. This number, divided by the number of payments to be made, equals the finance charge for that month. In the first month, the borrower has use of the whole amount borrowed, and the finance charge is 12/78 of the total interest; in the second month, it is 11/78, and so on. A $3,000 loan, paid in 15 equal installments of $225, has an interest payment of $28.13 in the first month, $26.25 in the second, and only $1.87 in the final month. Thus, under the add-on method, the finance charges in the early months are higher than later on, which means that paying off an installment loan early doesn't necessarily reduce the amount of interest the borrower would have paid. The truth in lending act, however, requires that lenders disclose how the finance charge will be computed if the debt is paid in full before maturity, so borrowers can weigh different financig alternatives before signing a loan agreement.