Finance Investing

What is Interest?

Have you checked your savings account statement recently? If not, please do – you will find a pleasant surprise, free money!

The money you earned is the gift that keeps on giving  – interest!


What is interest?

Interest is the cost to lend or borrow money. Let’s examine this definition from the perspective of a lender and a borrower.


Lender:

Continuing with our example of your savings account, you are acting as a lender to the bank. The bank is using your money to make additional loans (That’s actually how banks make a profit!). Because you’re allowing the bank to use your money, you’re rewarded with earning interest!


Borrower:

Let’s say you’re in the market for a brand new luxury sports car for $75,000 (BIG SPENDER)! If you don’t have the luxury of having $75,000 in cash at the moment (I certainly don’t), you will take out a car loan to make your purchase. In this example, you’re paying interest to borrow money.

So now you understand why banks pay you money, but more importantly understanding how interest functions from a lender or borrower perspective.


References: 

  1. https://www.investopedia.com/terms/i/interestrate.asp

 

 

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