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Interest is the charge for the privilege of borrowing money, generally expressed in annual percentage rates.
Interest is what you earn on deposits or are charged on a loan. It is based on the principle which means the amount of money deposited or the amount of money taken as a loan.
Prime rate set by the central bank is the basis of how you are charged or how you receive money that is in the bank
Consider the following.
Input ---> process ---> output
Inputs are factors of production.
There are three (or four) basic factors of production namely;
Land, Labour, Capital and (4th) Entrepreneurship.
Each factor requires some reward for its use in producing outputs. e.g land-rent, labour-wage, entrepreneurship-profit/loss.
The reward for the use of financial capital (money) is "interest".
According to islamic point of view, money can not be lent to earn interest. Instead, it can be used to acquire other factors of production which are then used for wealth generation.
01. The cost of funds loaned to an entity by a lender. This cost is usually expressed as a percentage of the principal on an annual basis. it can be calculated as simple or compound interest.
02. A fee that is charged by a lender to a borrower for the right to use the borrowed funds.
03. A fee paid for the use of another party's money. For the borrower, it is cost of renting money and for the lender, it is income from lending money.
Interest is calculated as a percentage of a loan (or deposit) balance, paid to the lender periodically for the privilege of using their money.
A borrowing cost in short or long-term loan.
I fully agree with previous answer
Interest is like charge against using an asset(cash). like you pay rent for using a building which is somebody's asset so its a charge for using that asset.
It is a payment or amount charged from borrower to a lender of amount repayment of the principle expressed as a percentage.
