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Meaning of Interest || Concept of Interest || +2

Meaning of Interest

Meaning of Interest

Meaning of Interest refers to a payment for the use of a certain sum of money for an agreed period of time. The payment made by a borrower for the use of loan for a year expressed as the ratio which that payment bears to the loan is called interest. And this term is known to representing the money equivalent while income is derived from capital. Thus interest is the price paid for the sorting period for the loanable funds or money capital.

Interest is commonly expressed as a certain percentage on the capital sum of the loan. If a person borrows Rs 1000 at the rate of interest of 10% per annum, he will have to repay Rs 1100 in the next year. Here Rs 1000 is the amount and Rs 100 is the interest.

Interest is divided into two types.

  • Net interest.
  • Gross interest.

Net interest

The net interest is the price paid for the services of capital employed. Net interest is that part of the gross interest which paid for the use of capital. According to Chapman net interest is the payment for the loan of capital, where there is no risk, no inconvenience and no work entailed on the lender.

Gross interest

The payment made by the borrower or for the use of capital to the lender comprises gross interest. It involves payment for the work risk and supervision of investment. According to Chapman gross interest includes payment for the loan of capital, payment cover risk of loss payment for the inconvenience of the investment and payment for the work and worry involved in watching investment calling them and investing.

If you liked our content Meaning of Interest, then please don’t forget to check our other content The Classical Theory of Interest

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