We all know that with every debt incurred is attached an interest, which has some specific percentages, known as the interest rate. We are obliged to pay our interest against the loan borrowed. But what exactly is interest and what is it’s history. This article will take you back into the roots of interest and will give you a quick review of what it exactly is.
History of Interest
Interest is defined to be a fee paid on taking a particular debt, usually against the borrowing of cash.
Generally speaking, interest is an act that is strictly forbidden in the Christian and Islamic faith. The Catholic Church had always argued the process of interest to be wrong, where it means charging the person double the amount of what he owed. However gradually this rule faded with the boom of the industrial revolution. In the Renaissance era, various people came up with the argument that interest was the amount paid for the risk that lenders took to give the borrower the benefit of using cash. It was further argued that the cash was not only consumption, but for production too, as when others would take loan, it would generally be for a business process. This hence justified the act of charging interest, and now banks worldwide charge interest on the amount of money taken for loan.
Interest Types
There are two types of interest, the simple interest and the compound interest.
Simple Interest: This interest is simply the calculation done on the original amount that is left unpaid.
Compound Interest: This interest is charged on top of another impending interest. That is as the borrower delays the payment, the more his interest will be added together. It will become a fee charged on the previous interest.
Commercial Interest
When interest started gaining commercial success, there came out to be various kinds of interest rates, a fixed and a variable ( floating) rates. These rates were the level of interest that would be charged on the borrowing of loan. With each year either the interest rate would be higher or it would remain fixed,each with their own pros and cons and with their own time limit.
Interest is calculated on complicated mathematical concepts and though it has brought profit to lenders, it has sure made the lives of million of borrowers a living hell. But business is business.
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