Interest

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Interest is the cost of borrowing money. It's important because borrowing money is a fundamental part of the economy. Whenever money is borrowed, there is usually interest to be paid by the borrower to the lender (unless a loan is interest-free, which doesn't happen very often). People borrow money to buy houses ( mortgages), to buy cars, to buy things - for all sorts of reasons - and companies also borrow money, to help them expand their businesses. When you use a credit card and do not pay off the entire balance due each month, making only the minimum payment due, you are essentially borrowing money and paying interest on the amount outstanding. The federal government borrows money by issuing bonds, and then pays interest to the bondholders. Cities borrow money the same way. Interest is usually expressed as a percentage of the amount being borrowed, known as the interest rate. There are two basic kinds of interest: (1) simple interest and (2) compound interest. Interest is also paid to holders of certificates of deposit and on certain types of savings accounts, because if you buy a certificate of deposit from a bank or keep a certain amount of money in your bank account, you are in effect lending the bank your money. See also Finance Charge and Interest Income.