A financial interest is basically the monetary reward for a service rendered, a monetary gain for commercial dealings, or the ownership of shares with the potential for monetary profit. Some examples are:

  • Salaries earned.
  • Wages earned.
  • Profit on money lent.
  • Profit on stocks.
  • Profit on intellectual property rights
  • Profit on foreign exchange.
  • Profit on goods sold.
  • Profit on real estate transactions.
  • Profit on shares.
  • A bank's monetary reward to a customer for keeping an account with them.

Simple and Compound Interests

An interest is either simple or compound. A simple interest is the predetermined rate, in percentage, on the capital amount loaned to the borrowing party, which the borrowing party expects to pay for being able to use the money. This type of interest is the most common. A compound interest, on the other hand, comprises the principal amount and the progressively compounding or accumulating profits on the loan.

Determining Kinds of Interest and Rates

Some of the factors to consider when trying to determine what kind of interest and how much a borrower should pay include the following:

  • How much the lender stands to lose potentially for lending the money instead of, for instance, investing it.
  • The amount of inflation expected.
  • How probable it is for the borrower to default.
  • How long the loan will last.
  • The potential of governmental change of interest rates.
  • How easy it is to cash the loan.

In order to quickly know roughly how long it will take an investment to double, use the rule of 72. Divide 72 by the interest rate. For example, if the interest rate is 4.5, 72 divided by 4.5 will reveal that your investment will double in roughly 16 years. 

History of Interest

Borrowing money and paying interest is a common practice today. But this wasn't always the case. Lending money for interest became popular at the time of the Renaissance. The practice of charging interests on loans dates back to ancient times. But social ideals that originated from the ancient Middle Eastern civilizations through the Middle Ages considered it a moral offense. That was partly because loans were mostly lent to the poor who become more indebted when they borrowed and additionally had to pay an interest.

Considering interest charging on loans immoral gave way at the time of the Renaissance. So, people started getting loans to improve their businesses and better their finances. The increase in commerce popularized loans and their attendant interests. This happened about the time in history when money started gaining value as a commodity. As a result, lending it rather than investing it began to attract interests considered justifiable.

In countries like Pakistan, Iran, and Sudan, interests charged on loans were forbidden in the financial systems. This was so that lenders would partner with borrowers, seeing them as investors and sharing in their profits and losses, instead of charging them an interest. The anti-loan interest trend in Islamic banking became widely embraced toward the close of the 20th century.

Credit Line Interests

However, today, interest rate charges are on diverse financial products, like mortgages, car loans, credit cards, and personal loans. The federal government increased rates by three times in 2017 owing to unemployment rates and the increase in GDP (Gross Domestic Products). The interest rates of credit cards differ owing to several factors, one of which is the kind of credit card, for instance, cash back, travel rewards, business, and so on.  

The business of credit cards, designed for people with poor credit, usually goes with interest rates as much as 25%. They typically go with increased fees and greater interest rates. They're also used to fix a bad credit or build a credit record. So, one's credit score has much to do with the interest rates they're offered as it concerns diverse lines of credit and loans.

Credit Scores and Annual Percentage Rates

For instance, for personal loans based on APRs (Annual Percentage Rates), in 2018, people with excellent scores of between 850 and 720 pay roughly 10.3% to 12.5%. On the other hand, people with poor credit scores of about 300 to 639 will have to pay increased APRs of about 28.5% to 32%. People whose credit scores are on the average pay APRs ranging anywhere between 17.8% and 19.9%.

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