What is it for and why? I found a lot of questions on interest rate but not what interest itself is
Thanks in advance 🙂
Edit: Thank you for all the replies i am now a financial god of wisdom, i’m not going to reply to unless something is unclear to me but comments will all be read
In: 9
Suppose you borrow 100$ from someone. Now, the person giving you the 100$ could do so “without interest”, meaning that you only have to pay back those exact 100$ – regardless of when you do so.
If the person demands interest, they’re saying: I’ll lend you 100 bucks, but for every month you haven’t paid me back those 100 bucks, you’ll have to pay me a little bit extra atop of that.
Interest is usually based on percentages. So if that guy wanted 1% interest on his 100 bucks, you’d then have to pay back the 100 bucks PLUS one additional buck (100 * 1%). And if you hadn’t paid him back after two months, it would be (101*1%)=102,01$, and so forth.
The idea basically is to a) make you pay back your loan in a timely fashion because the longer you don’t pay, the more you’ll have to pay. And b) The person you borrowed money from gets “paid” for borrowing you money via the accumulating interest.
Mind you, this can also go the other way when *you* deposit money with a bank. The bank will then pay interest to you because it doesn’t just safeguard the money for you (in most cases), but actively uses it to finance other parts of its business.
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