Interest
From ForcaWiki, the simple encyclopedia
| In one sentence | Extra money paid over time for the privilege of using someone else's money. |
|---|---|
| Category | Finance |
| Related | Debt, Loan, Return, Vig |
Imagine borrowing 10 dollars from a friend and agreeing to pay back 11 dollars next month. That extra dollar is not a gift. It is a small reward you are paying your friend for letting you use their money for a while instead of them keeping it for themselves.
That extra dollar is interest: money paid over time for the use of another party's money. Whenever someone takes out a Loan, creating a Debt they owe, they almost always have to pay back more than they borrowed, and that extra amount is the interest.
Why lenders charge it
Lending money is not free for the lender. They are giving up the chance to spend or invest that money themselves for as long as the loan lasts, and they are taking on the risk that they might not get paid back at all. Interest is how a lender gets rewarded for both of those things.
Fun facts
- Interest is usually described as a percentage of the amount borrowed, charged over a set stretch of time, like 5 percent per year.
- The interest a lender earns is a big part of their Return, the overall reward they get back for lending or investing their money.
- A more colorful, informal word for interest earned on an investment or loan is Vig, a term borrowed from gambling slang.