Interest is the price borrowers pay to lenders for the use of their money. It allows borrowers to make purchases that they could not afford if they had to pay immediately. Interest is calculated as a percentage of the loan amount. Interest is based on the concept that lenders are entitled to a return on their investment. Interest compensates a lender for giving up their right to use the money for a period of time or to use that money to generate profit in other ways.
Interest plays an essential part in commerce.
Business, consumers and governments borrow and lend money, and thus pay and receive interest. Institutions or people who grant loans have incomes greater than their expenditures, so they let others use their money. Instead of keeping or spending their surplus funds, lenders use it to generate more income through interest. Smart consumers should learn as much as they can about the interest rates that they agree to pay. Some merchants may try to make a profit by selling items at low prices but charging a high interest rates on credit payments.