What are bank interest charges?

Interest is basically a rent of the money used by the borrower. Bank interest charges are of many types such as interest charges on credit card, home loans, etc. The bank is a lender which actually charges interest because the money they issue to the borrower could have been used for an investment but they were in reality advanced to the borrower but in any case the bank enjoys the benefit by charging the interest from the borrower whenever the borrower makes any payment to the payee by the use of credit card because it is not the borrower but instead the bank which pays to the payee on the behalf of the credit card holder. The money given to the borrower is been termed as opportunity cost. The bank interest charges vary because of many factors and schemes under which the money has been given to the borrower.

concept of bank interest charges

The money given to the borrower is the principal on which the interest is been charged. So the fact is that the borrower pays the money for the principal. There are many factors which are responsible in deciding the value of interest charged such as:
1.) Opportunity cost-
If the bank would have invested the money in some other field it would definitely have had a profit, but since he has used the money to give to borrower, this factor is a deciding factor for the interest rate.
2.) The lender would try to charge the interest according to the estimates of the expected inflation done. So some part of the total interest charged is the inflation estimation also.
3.) There is always a risk that the borrower might not be able to repay the loan or the credit he/she takes from the creditor or he might turn absconding, so there is a risk premium which forms the part of the total interest charged by the creditor .The risk premium varies from individual to individual & country to country. For e.g.:-Canada pays a lesser amount of risk premium than India because Canada is a developed country whereas India is a developing country so the creditworthiness does makes a lot of difference when the interest rate is been decided.
4.) The length of time also plays an important role in deciding the interest rate of the borrowed money. If length of time for paying the entire principal plus the interest is less, the interest rate will be less because then inflation and risk of getting default will be less, because predicting near future is very easy.

The bank interest charges also vary because of the factors like recession because during recession the liquidity problems tend to take place and the banks have to take necessary steps to regain the momentum and make more borrowers. Also the interest rate is different from bank interest charges because if supposedly you have a balance of $500 and you want to calculate the bank interest charge on an interest rate of 20% then your interest charge will be $100. So actually your interest charge comes different because your balance for every period is not same.

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