Economics

Difference Between Gross And Net Interest

Distinguish Between Gross And Net Interest

Interest is the reward for capital for its productive services. It is the Payment made by a borrower for the use of money for a period of time. According to Prof. Meyers:

Interest is the price paid for the use of loan-able funds.

According to Cairncross

Interest is the price paid for the hire of loan.

All these definitions emphasize the fact that interest is the payment for the use of Money capital.

Gross Interest and Net Interest:

Gross Interest: The actual amount paid by the borrower to the creditor is called ‘Gross interest’. Gross interest includes four elements

1. Insurance against risk : A part or the interest received by the lender is a payment for the risk undergone by him in lending money to the borrower. Smaller the risk involved in a loan, the lower shall be the interest rate.

2. Payment for inconvenience : There is inconvenience in lending the money. The lender may not get back his money when he requires it for his own and urgent use. Hence interest paid has to include a payment as a reward for inconvenience in lending.

3. Reward for Management: Every lender has expenses to the loan. This results in extra expenditure and the lender compensates himself against this by adding one or two percent more to the net interest chargeable on the loan.

4. Net Interest : Gross interest includes the net interest also which is paid for the use of capital only.

Net Interest : Net, interest is only a part of the gross interest. It is the payment made by a borrower for the use of capital only.

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