Interest is a reward paid for the use of capital. It can also be define as
“Interest is the price paid for the use of money or credit”.
“The price paid by the borrower to the lender for the use of loan able funds during a certain period”. According to classical economists.
“Interest is a reward for saving”.
According to Keynes
“Interest is a reward for parting with liquidity for a specified period of time”
“Interest is the price paid for the use of money or credit”.
Net interest:
It is a reward paid for the use of money only. It does not include other kind of payments.
Gross interest:
Gross interest is composed of some or all of the following payments.
1. Net interest:
A payment for the use of loan able funds only.
2. Insurance against risk:
When a leveller lends money to the borrower, he undertakes risks. E.g. a borrower turned out to be dishonest and filuses to pay luck the interest and the principal sum loaned, or he may invest the amount in some risky units or enterprise and two lose all this money. In all these cases, it is the lender who is to suffer. So the lender demands some additional amount beside net interest to cover such risks.
3. Payment for inconvenience:
When a lender lends money, he may face a number of in inconveniences. He has to issue notices for the payments of debts. In case the loan is not paid at the due date, then he may have to file a case against the borrower in the court. Secondly if he himself in need of money during the same period, then he will have to borrow from other people. In order to cover such inconveniences a lender charges some additional amount from the borrower.
4. Remuneration for services:
The lender has to keep a complete record of the total amount loaned and repaid by the borrowers. For keeping such record, he has to purchase stationary, pay wage, to employs etc. so a lender charges some extra payments from the borrower.
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