Interest is the payment made by a borrower to a lender for the use of money, typically expressed as a percentage of the principal amount borrowed or deposited. It represents the cost of borrowing money or the reward for lending or saving money
. Key points about interest include:
- It is an additional amount paid over the principal sum borrowed or deposited.
- The rate at which interest is charged or earned is called the interest rate, usually expressed as an annual percentage rate (APR)
- Interest can be simple (calculated only on the principal) or compound (calculated on the principal plus previously earned interest), with compound interest causing exponential growth of the amount owed or earned
- Borrowers pay interest as a cost for using someone else's funds, while lenders or depositors earn interest as compensation for temporarily parting with their money
- The amount of interest charged or earned depends on factors such as credit risk, loan length, and macroeconomic policies like the Federal Reserve's rates
- Interest differs from dividends, which are profit shares paid to company shareholders, and from profit, which is the return on ownership or investment
In summary, interest is the financial charge or reward associated with borrowing or lending money, calculated as a percentage of the principal over a period of time
