INTEREST RATES

Encyclopedia of Everyday Law, October, 2005

BANKING INTEREST RATES

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Background History Interest and Inflation State Usury Laws Additional Resources Background

In the world of banking and finance, interest is money that is paid by a borrower to a lender in exchange for the use of the credit. Money held in an account, such as a bank savings or checking account, may earn interest also because the bank has use of the money while it is held in the account and the interest constitutes payment to the account holder for the temporary use of the money.

Typically, interest is computed as a percentage of the amount borrowed, which is known as the principal. Interest may be computed on a yearly basis, which is known as simple interest. For example, if a borrower borrows $1,000...