What is the definition of interest?

The definition of interest is the fee charged for using someone else's money. This concept is fundamentally important in finance, as it represents the cost associated with borrowing capital. When an individual or organization borrows money, they are essentially using funds that they do not own, and in return, they pay interest as compensation to the lender for this privilege.

Interest can be calculated in various ways, usually expressed as a percentage of the principal amount, which is the initial sum of money borrowed or invested. It is crucial in various financial transactions, including personal loans, mortgages, and credit card debts, where lenders charge interest to earn a return on the money they provide.

In contrast, the other options do not accurately define interest. While savings accounts may offer bonuses or interest that rewards the account holder for keeping their funds deposited, and the principal amount refers directly to the original amount of a loan or investment without reference to its cost, these definitions do not capture the essence of interest itself, which is fundamentally about the cost of borrowing funds.