Q.Write a short note on: Net interest

Net interest (pure interest) is the part of gross interest that is paid solely for the use of borrowed capital, leaving out the charges for bearing risk, for inconvenience and for the trouble of managing the loan. It is the pure reward of capital as a factor of production.

Meaning

When money is lent, the total payment received by the lender is called gross interest. Gross interest is made up of several elements:

• payment for the use of capital itself (pure or net interest),
• reward for the risk of possible loss of the loan,
• payment for the inconvenience of parting with money, and
• payment for the work of managing and recovering the loan.

Net interest is only the first of these: the payment made purely for the use of capital, after all the other elements are deducted. Thus:

Net Interest = Gross Interest minus (reward for risk + reward for inconvenience + reward for management).

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