Gross and Net Interest
Much of what is called interest is not the price of the service of capital as such. What people generally call interest is really gross interest. Pure interest is only a small proportion of gross interest as explained by this fact. Pure interest tends io equality in different employments, provided competition is free and perfect. (;nlss Interest, The total amount which the debtor pays to the creditor is known as gross interest as already indicated. All that the borrower pays to the lender is not pure or net interest, i.e., the price paid for the services of capital only. It is mixed up with so many other elements, of which Pure or Net Interest is only one. Gross interest consists of the following elements Pure Interest, This is a payment only for the services of capital as such or for the money borrowed. Insurance against Risk. TIle lender is exposed to risk when he lends money. A certain 11 amount must be paid to him to cover these risks .’ These risks are of two kinds: (i) personal risks due to the unreliable character of the borrower himself, and (il) trade risks. Trade risks are due to the varying fortunes of the business in which the money is invested. Thu s, the lender may fear that either the borrower may leruse to pay back the loan and the interest on it or he n lay lose the money in his business. The greater the risk of this kind, the higher will have to be the insurance- money that the lender will expect before he is willing 10 lend. (e) Wages of anagt lll!’nt. A part of the pay- ment may be due to the wages of management. The lender has to keep accounts and to arrange for new loans for short period. Money-lending is his whole time job.
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