People or businesses in debt pay interest on borrowed money which is a fee Interest can be thought of as “rent on money”. For example there is a certain rate you have to pay if you want to borrow money from a bank, according to how much you want loaned to you.

Other useful investments could have been made with the loaned money so the fee is compensation to the lender foregoing those opportunities. These foregone investments are known as the opportunity cost. The borrower enjoys the benefit of using assets ahead of the effort required to obtain them, while the lender enjoys the benefit of the fee paid by the borrower for the privilege. The borrower is in debt. The amount lent is called the principal. This principal value is held by the borrower on credit. Interest is therefore the price of credit, not the price of money as it is commonly – and mistakenly – believed to be. The percentage of the principal that is paid as a fee (the interest), over a certain period of time, is called the interest rate.