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Interest definition
Interest is the cost of borrowing money or the return earned from lending or saving it. A borrower pays interest to a lender for the use of funds, and a saver or investor earns it for providing them.
Interest is usually worked out by applying an interest rate to the principal, the original sum borrowed or saved. It can be simple, calculated only on the principal, or compound, calculated on the principal plus any interest already accumulated, which makes a balance grow faster over time.
Interest is the money amount, while the interest rate is the percentage used to calculate it. A 5% rate on a USD 1,000 loan produces USD 50 of interest: the 5% is the rate, and the USD 50 is the interest. Higher interest raises borrowing costs for borrowers and lifts income for savers and lenders.
Interest Example
You deposit USD 5,000 into a savings account paying a 3% annual interest rate.
The interest earned in a year is:
USD 5,000 √ó 3% = USD 150
You earn USD 150 in interest after one year, before any tax or compounding.
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