When you borrow money from a close friend, the only thing you have to repay is that amount you borrowed (this is called the principle amount), especially when it is a small amount. Instead you are borrowing from a financial institution, or a bank, and then you will have to repay the original amount plus some additional amount to receive the services they offer. This additional amount charged by the financial institutions or banks is called interest.
Mathematically to say the percentage of the principle amount that is charged as interest is called the interest rate of the loan. The interest rates could be fixed or flexible. For most of the loan schemes offered as home loan these days have both fixed and flexible rates offered. In case of a fixed rate of interest, the interest rate remains the same throughout the duration of the repayment. In case of flexible interest rate, the interest rates vary with time depending on variations in their deciding factors.
The interest rates are generally calculated on an annual basis. This means that the interest to be paid annually is decided and this interest calculated will be added to the monthly repayment amount. Some financial institutions also have monthly interest rates also.