![]() To account for this risk, lenders charge interest. There is a chance that the borrower will default on (not pay back) their loan. Without charging interest, the lender would be left with less purchasing power than they started with. As noted in the section 3.1, due to inflation money’s purchasing power slowly decreases. Interest is charged on the principal due to the following factors: ![]() The original amount borrowed, loaned or invested is called the principal. Just like you pay to rent a car or rent an apartment, you pay to “rent” money. It is the amount of money that is paid in addition to the amount borrowed, loaned or invested. In both of these scenarios, an increase in the amount of money is due to interest. In contrast, when you borrow money in the form of a loan, the total amount you will have to repay will be more than the amount you originally borrowed. At a later date, you can withdraw more money than you deposited. If you deposit money into a savings account, the amount of money in the account gradually increases. ![]() Two services typically offered by banks are savings accounts and loans. ![]()
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