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Interest can quickly turn a credit card balance into costly debt.
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Also Known As:
money rate
interest, the price paid for the use of credit or money. It may be expressed either in money terms or as a rate of payment. A brief treatment of interest follows. For full treatment, seecapital and interest.
Interest may also be viewed as the income derived from the possession of contractual promises from others to pay sums in the future. The question may be asked, âWhat is the value today of a promise to pay $100 a year from now?â If the answer is $100, then no interest income is generated. Most people, however, would require an inducement to give up $100 today and for the next year. If $5 were sufficient inducementâthat is, if they would buy such a promise for $95âthen interest income of $5 has been generated at a rate of just over 5 percent.
Various theories have been developed to account for and justify interest. Among the better known are the time-preference theory of the Austrian, or Marginalist, school of economists, according to which interest is the inducement to engage in time-consuming but more productive activities, and the liquidity-preference theory developed by J.M. Keynes, according to which interest is the inducement to sacrifice a desired degree of liquidity for a nonliquid contractual obligation. It may be mentioned that in Marxist theory interest, like capital itself, is a portion of labour expropriated by the capitalist class by virtue of its political power.
