Interest is the compensation payed by a borrower to a lender in compensation for loss of the use of the money and for the risk that the money will not be paid back. Interest bearing loans can be in many different forms:
- there may or may not be a note associated with the loan
- they may be tradable in a secondary market
- interest payments can be periodic or only when the principal is repaid
- the creditor can have different levels of standing in the event of bankruptcy.
While interest is a cornerstone of modern finance and mainstream economics, there is a long history, continuing to current times, of moral objections to the payment of interest.
Rates of interest edit
The exact amount of interest charged in any given case will depend in general on
- the duration of the loan
- alternative opportunities for investment or consumption
- the creditworthyness of the borrower and the collateral offered
Thus an overnight (one day) loan to an extreamly creditworthy borrower who posts good colateral will in general have the lowest interest rate, and a long term unsecured loan will have the highest rate.
Calculating interest edit
History of interest edit
Interest in the West to the Renisance edit
Interest rates are recorded as early as ~3000 BCE in messopotemia.
Medievial Europe edit
China edit
Objections to interest edit
Usury edit
Non-mainstream economics edit
References edit
- Homer & Sylla (1996) A History of Interest Rates, Rutgers Unversity Press