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What is Interest
Interest is a term for the charge for borrowing a sum of money.

Interest is a term under which it is understood a contractually fixed remuneration for the borrowing a sum of money, i.e. the payment for the loan. In most cases, the interest is an amount of money, which together with other costs makes the total cost of the loan. Value of interest may vary depending on the duration of the loan or the amount thereof. Size of the interest is expressed by using the concept of interest rate.

Typically, the interest by which the saved capital will be borne is presented in an absolute amount.

Calculating interest:

If the interest period is in years:

Interest = (principal × rate × time) / 100

  • Principal - capital from which the interest is calculated
  • Rate - interest rate (in percent per year)
  • Time - length of interest term (in years)

If the interest period is in months:

Interest = (principal × rate × time) / 100 × 360

  • Principal - capital from which the interest is calculated
  • Rate - interest rate (in percent per year)
  • Time - length of interest term in days

There are several methods of calculation which differ in the amount of time variable:

  • German way - considers the constant number of days - 30 for all months of the year
  • French way - considers the exact number of days in a month
  • English way - considers the exact number of days in a month, but the year is considered with a length of 365 days

After calculating the interest, income taxes still have to be considered.

What is Interest used for?

Interest is used for expressing financial value that the debtor pays to the creditor for a loan in excess of the principal. One cannot forget the other costs associated with the administration of the loan.

Lending at too high interest is called usury.

Related terms and methods:

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Last update: 11.08.2016

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