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:
“Parents do not give up their children to strangers lightly. They wait in uncertain anticipation for an expression of awareness and interest in their children that is as genuine as their own. They are subject to ambivalent feelings of trust and competitiveness toward a teacher their child loves and to feelings of resentment and anger when their child suffers at her hands. They place high hopes in their children and struggle with themselves to cope with their childrens failures.”
—Dorothy H. Cohen (20th century)
“The most ingenious men continually pretend to condemn trickingbut this is often done that they may use it more conveniently themselves, when some great occasion or interest offers itself to them.”
—François, Duc De La Rochefoucauld (16131680)
“There is a mortifying experience in particular, which does not fail to wreak itself also in the general history; I mean the foolish face of praise, the forced smile which we put on in company where we do not feel at ease, in answer to conversation which does not interest us. The muscles, not spontaneously moved but moved, by a low usurping wilfulness, grow tight about the outline of the face, with the most disagreeable sensation.”
—Ralph Waldo Emerson (18031882)