Interest

This article is about the financial term. For other uses, see Interest (disambiguation).

A bank sign in Malawi listing the interest rates for deposit accounts at the institution and the base rate for lending money to its customers

In finance and economics, interest is payment from a debtor or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate.[1] It is distinct from a fee which the borrower may pay to the lender or some third party. It is also distinct from dividend which is paid by a company to its shareholders (owners) from its profit or reserve, but not at a particular rate decided beforehand, rather on a pro rata basis as a share in the reward gained by risk taking entrepreneurs when the revenue earned exceeds the total costs.[2][3]

For example, a customer would usually pay interest to borrow from a bank, so they pay the bank an amount which is more than the amount they borrowed; or a customer may earn interest on their savings, and so they may withdraw more than they originally deposited. In the case of savings, the customer is the lender, and the bank plays the role of the borrower.

Interest differs from profit, in that interest is received by a lender, whereas profit is received by the owner of an asset, investment or enterprise. (Interest may be part or the whole of the profit on an investment, but the two concepts are distinct from each other from an accounting perspective.)

The rate of interest is equal to the interest amount paid or received over a particular period divided by the principal sum borrowed or lent (usually expressed as a percentage).

Compound interest means that interest is earned on prior interest in addition to the principal. Due to compounding, the total amount of debt grows exponentially, and its mathematical study led to the discovery of the number e.[4] In practice, interest is most often calculated on a daily, monthly, or yearly basis, and its impact is influenced greatly by its compounding rate.

  1. ^ "Definition of interest in English". English Oxford Living Dictionaries. Oxford University Press. Archived from the original on December 27, 2017. Retrieved 27 December 2017. Money paid regularly at a particular rate for the use of money lent, or for delaying the repayment of a debt.
  2. ^ "Definition of dividend". Merriam Webster. Archived from the original on 27 December 2017. Retrieved 27 December 2017. a share in a pro rata distribution (as of profits) to stockholders.
  3. ^ "Profit". Economics Online. Archived from the original on 27 December 2017. Retrieved 27 December 2017.
  4. ^ O'Connor, J J. "The number e". MacTutor History of Mathematics. Archived from the original on 2 October 2012. Retrieved 26 August 2012.