MONEY AND FINANCE

What Does Interest Mean?

What Does Interest Mean?

It should come as no surprise that interest is the amount of money paid when a person borrows money. The lender charges the borrower for the use of this borrowed money in order to be enticed to make the loan.

Other types of assets earn interest for the lender. Money is the most obvious but such things as shares of stock, consumer goods, aircraft along with entire factories earn interest from the borrower. As you might surmise with these types of assets, the interest is calculated based on the value of the asset at the time of the loan.

A good way to think of interest on a loan is to think of it as rent on the borrowed money. If you borrowed money from a bank, you would be charged a certain rate on the money loaned to you.

A lender is willing to kame a loan at a certain interest because they consider it as adequate compensation for forgoing other useful investments that could have been made with the loaned asset. In the business world, the assets the lender forgoes are known as opportunity cost.

Simply stated, the lender does not use the assets directly. Instead, they are advanced to the borrower. The borrower then enjoys the benefit of using the assets ahead of the effort required to obtain them, while the lender enjoys the benefit of the fee paid by the borrower for the privilege.

Another meaning attached to interest has nothing to do with money. Rather, it is a feeling that accompanies or causes special attention to an object or class of objects or a person. For example, you may have a special interest in a member of the opposite sex. Something about that person has caused your interest to become elevated.

Some people have a special interest in a particular type of music, sport, social cause or political agenda. Something has definitely caused a serious reason to devote special attention to that interest.

All of this interest usually comes without any money attached unless the person decides to buy any items for sale in that field. Spending money is not mandatory but it usually closely follows a special interest.

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