What is interest

Interest is the cost you pay to borrow capital and is a kind of compensation for borrowing money. Interest is often a percentage of the loan amount. When you have a loan, you pay both towards the loan and the interest for taking out the loan. You can also receive interest on your bank account from the bank.

Interest can consist of three different parts. It can be compensation from the lender for providing capital. A risk premium that gives the lender a bonus for the risk of the loan. Or compensation for inflation if inflation can rise for a period.