Interest rates are associated with virtually all forms of money lending and borrowing. Borrowing is a common way for people to finance major purchases like homes and vehicles, as well as smaller expenses like starting and maintaining businesses and paying for school. Borrowing money allows companies to invest in long-term assets like land, buildings, and machinery, as well as finance capital expenditures necessary for growth. You can repay a loan in a single lump sum by the due date, or you can make payments over time.
The interest rate is computed and added to the loan’s principal. Both the lender’s rate of return and the borrower’s cost of borrowing is expressed in the interest rate. Because lenders demand compensation for the loss of use of the money throughout the loan time, the total amount that must be repaid is typically greater than the amount originally borrowed.