Interest is a fee paid by a borrower of assets to the owner as a form of compensation for the use of the assets. It is most commonly the price paid for the use of borrowed money, or money earned by deposited funds.
When money is borrowed, interest is typically paid to the lender as a percentage of the principal, the amount owed to the lender. The percentage of the principal that is paid as a fee over a certain period of time (typically one month or year) is called the interest rate. A bank deposit will earn interest because the bank is paying for the use of the deposited funds. Assets that are sometimes lent with interest include money, shares, consumer goods through hire purchase, major assets such as aircraft, and even entire factories in finance lease arrangements. The interest is calculated upon the value of the assets in the same manner as upon money.
Interest is compensation to the lender, for a) risk of principal loss, called credit risk; and b) forgoing other investments that could have been made with the loaned asset. These forgone investments are known as the opportunity cost. Instead of the lender using the assets directly, they are advanced to the borrower. The borrower then enjoys the benefit of using the assets ahead of the effort required to pay for them, while the lender enjoys the benefit of the fee paid by the borrower for the privilege. In economics, interest is considered the price of credit.
Interest is often compounded, which means that interest is earned on prior interest in addition to the principal. The total amount of debt grows exponentially, most notably when compounded at infinitesimally small intervals, and its mathematical study led to the discovery of the number e. However, in practice, interest is most often calculated on a daily, monthly, or yearly basis, and its impact is influenced greatly by its compounding rate.
Famous quotes containing the word interest:
“But what would interest you about the brook,
Its always cold in summer, warm in winter.”
—Robert Frost (18741963)
“The moral sense is always supported by the permanent interest of the parties. Else, I know not how, in our world, any good would ever get done.”
—Ralph Waldo Emerson (18031882)
“Treading the soil of the moon, palpating its pebbles, tasting the panic and splendor of the event, feeling in the pit of ones stomach the separation from terra ... these form the most romantic sensation an explorer has ever known ... this is the only thing I can say about the matter. The utilitarian results do not interest me.”
—Vladimir Nabokov (18991977)