Interest Calculator
For other senses of this word, see interest (disambiguation). In finance, interest is the price paid by a borrower for the use of a lender's money. In other words, interest is the amount paid to "rent" (hire in British English) money for a period of time. The original amount lent is called the principal, and the percentage of the principal which must be paid annually as interest is called the interest rate. Learn more through our mortgage calculators, new and articles. Interest rates are crucial indicators in financial markets.
The existence of interest
There are a variety of reasons which explain why lenders charge interest for the use of their money:
The time value of money: Most people would choose to have money in the present rather than money in the future. When asked to lend their current money in exchange for a promise to repay that money in the future, most lenders will agree only if they are repaid more than they originally lent. In effect, the interest rate is the payment for the use of money over time. This Compound Interest Calculator illustrates the effects of compounding on the
effective interest rate. Alternative investments. The lender has a choice between using his money in different investments. If he chooses one, he forgoes the returns from all the others. In other words, lending incurrs an opportunity cost due to the possible alternative uses of the lent money. Certificate of deposit calculator. Inflationary expectations.