Interest

Generally speaking, interest is the payment made by a borrower or deposit-taking financial institution to another borrower or depositor of an amount over and above the principle sum (i.e. the amount borrowed) at a certain rate. It differs from a charge that the borrower may be required to pay to the lender or to a third party. Another distinction is that it differs from a dividend, which is paid to shareholders (owners) by a company out of profits or reserves at a specific rate determined in advance, but rather on a pro-rata basis in order to share in the reward gained by risk-taking entrepreneurs when the revenue earned exceeds the total costs.

If a customer borrows money from a bank, he or she will typically pay interest on the money they borrow, resulting in a payment to the bank that is greater than the amount borrowed; if a customer earns interest on their savings, they will typically withdraw more money from their savings account than they originally deposited. In the case of savings, the client serves as the lender, and the bank serves as the borrower in this transaction.

A significant distinction between interest and profit is that interest is received by the lender, but profit is obtained by the owner of a valuable asset, investment, or business. (Interest may be a part or the whole of a profit on an investment, the two notions are separate from one another from an accounting standpoint.)

It is calculated by dividing the amount of interest paid or received over a certain time by the total amount of principle borrowed or loaned (usually expressed as a percentage).

Compound interest is defined as interest gained on preceding interest in addition to the main amount of the loan or loan repayment. The total amount of debt rises exponentially as a result of compounding, and the mathematical study of this phenomenon led to the discovery of the number e. In reality, interest is most typically computed on a daily, monthly, or annual basis, and the extent to which it has an effect is strongly impacted by the rate at which it is compounded.