All You Need to Know About Earning and Paying Interests

To explain the concept of interest in simpler words, we need to ask a question – Why do you need to borrow money? The answer: To purchase something. One may need to borrow money for buying a home, starting a business or almost anything else. And in return, you might have to pay the money back along with a little extra money. This extra money is what is termed as “interest”.

Interest can be defined as the price you pay to use somebody else’s money. How much will it cost you? What extra “interest” would you have to pay, is the real question. Higher rates mean you pay more for the same amount of money.

Earning Interest

The biggest motto of lending money to someone is to receive interest on it. For example, depositing money into savings account is in a way lending money to your bank. Banks use this money to make loans and for other related transactions. The bank pays you interests when you use a savings account, and the savings account interest rate, varies from bank to bank. This interest is paid to you because the bank aims to keep your money in the bank at all costs.

Paying Interest

When you borrow money from banks or other financial institutions, you generally pay them back with interests. The amount of interests depends upon the amount borrowed, and the time-frame you chose to return it to the banks. With every monthly payment or EMI, you repay a portion of your original loan and a portion of your interest levied.

Interest earned or paid will depend on how you tackle money. Depending on the loan you avail or the fixed deposit you register, your interest deductions and earnings will vary. So, choose a plan wisely.