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LSDefine
Simple English definitions for legal terms
interest
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A quick definition of interest:
Interest: When you borrow or lend money, you may have to pay or receive extra money called interest. This is in addition to the original amount of money borrowed or lent, which is called the principal. The interest is usually a percentage of the principal and can be fixed or change over time. If you borrow money, the interest rate may be higher or lower depending on how risky it is for the lender to lend you money. If you deposit money in a bank, you may earn interest on your savings over time, which can add up to more money.
A more thorough explanation:
Interest is a fee that is charged when someone borrows money or earns when someone lends money. When a person borrows money, they are expected to pay back the initial amount borrowed, called the principal, along with an additional amount, which is the interest. The interest is usually a percentage of the principal amount and is determined by an interest rate.
For example, if someone borrows $100,000 with an interest rate of 10%, they would have to pay back $110,000 in total. The extra $10,000 is the interest.
Interest rates can be fixed, which means they stay the same throughout the loan term, or variable, which means they can change over time. The amount of interest a person has to pay can also vary depending on the lender and the borrower's credit score.
On the other hand, when someone deposits money into a bank account, they can earn interest on their deposit. The interest earned is usually a percentage of the deposited amount and can accumulate over time, resulting in compound interest.
For example, if someone deposits $1,000 into a savings account with an interest rate of 5%, they would earn $50 in interest after one year. If they leave the money in the account and earn interest on the initial deposit and the interest earned, they would earn compound interest.
Overall, interest is a crucial aspect of borrowing and lending money, and it is essential to understand how it works to make informed financial decisions.