The Role of Interest

Interest is the cost of borrowing money or the reward for lending it. When you borrow, interest is the extra amount you pay back on top of the original amount, serving as compensation to the lender. Conversely, when you lend money, interest is the earnings you receive. It is typically expressed as a percentage rate, which can vary based on factors like loan duration and risk. Interest helps allocate resources efficiently by encouraging savings and investment, and it influences economic activity by impacting borrowing costs and consumer behavior.