What is the bank interest?

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

Bank interest appeared with the advent of banks. Although in ancient times there was a practice of lending something with a requirement to return a larger amount of the product. It must be said that the ancient philosophers did not approve of usury, because. believed that money has no value of its own, because it was not there at the time of the Creation of the world by the Almighty. And what has no intrinsic value can be transferred free of charge to another person without loss to the original owner. The tradition of treating one of the most common banking operations in this way has been preserved in Islamic culture. In its modern form, bank interest began to exist in the 17th century, when trade among the middle class was actively developing.

Many economic processes depend on the value of this parameter. But keep in mind that bank interest is a fairly broad concept. There are at least three varieties of it:

- interest rate on deposits and deposits, which the bank pays to the one who placed his funds in a credit institution;

- interest on loans that must be paid by the one who borrowed from the bank;

- interest oninterbank loans, which banks pay each other when they place temporarily free cash.

It is believed that high bank interest has a negative impact, because. it reduces business activity by increasing the cost of capital. For those who place funds on deposit, this may be good. But this increases lending rates, reduces the number of individuals and organizations that would like to take out a loan from a bank, which ultimately leads to lower deposit rates.

When the bank interest rate decreases, all participants in economic processes can receive more inexpensive money that is invested in the creation of production capacities, stimulate trade processes, which leads to more jobs, more production, collection of more taxes while the same rates, etc. Therefore, the state has long sought to regulate these processes by influencing the discount rate, tax legislation and the system of deposit insurance of the population.

Bank interest on deposits is calculated on the basis of the terms of the agreement, which may include the payment of interest at the end of the term of the deposit or the payment of interest, for example, quarterly until the end of the deposit. Interest is calculated differently if, for example, they are accrued monthly and are not withdrawn. In the simplest case, to determine the income on the deposit, you need to multiply the deposit amount by (1 +interest rate / 100deposit time in days / 365 days a year).

The interest that a client pays to a financial institution on a loan also depends on a number of reasons, including the method of returning the amount taken and the interest. They can be returned jointly (percentage and part of the loan is paid), by the annuity method (return in equal installments) and payment of the principal amount of the loan only at the time of repayment. Here it is interesting that with the same interest rate and different methods of accrual, the total amount paid to the bank may vary slightly.