Interest: the price of time

What you are actually paying for

Interest is the price of two things nobody can print: time and risk.

Time first. A dollar today is worth more than a dollar next year, because today’s dollar can be put to work now. When a lender hands money over, they give up every use of it until it comes back; interest is the rent on that lost time. Risk second. Some borrowers never repay. A lender who charged nothing would slowly bleed to death from the ones who default, so part of every interest rate is an insurance premium against not being repaid. That is why a mortgage backed by a house costs less than a credit card backed by a promise: less risk, lower price.

Interest rates are quoted as a percentage of the amount borrowed (the principal) per year. Borrow $1,000 at 10% and the time-and-risk rent is $100 a year.

Both sides of the counter

Here is the part beginners miss: interest is not a fee that happens to you. It is a price, and you will stand on both sides of it.

• When you save or lend, you earn it. A bank deposit is a loan to the bank; the interest it pays you is your cut for the time your money worked there.
• When you borrow, you pay it. A loan is spending tomorrow’s income today, and the interest is what tomorrow charges for the privilege.

Same price, opposite directions. Over a lifetime, the single biggest fork in the road is which side of the counter you mostly stand on: collecting the rent on time, or paying it. The credit lessons walk the paying side; the saving lessons walk the earning side.

Simple vs. compound: a preview

Simple interest pays on the principal only. Put away $1,000 at 5% simple and you earn $50 every year, and after 10 years you have $1,500. Compound interest pays on the principal and on the interest already earned. The same $1,000 at 5% compounded yearly grows to about $1,629 in 10 years, because each year’s interest starts earning its own interest. A $129 difference sounds small; over 40 years it is the difference between $3,000 and roughly $7,040. Compounding is important enough to get the whole next lesson.

What the Bible says about charging it

Israel’s law took a hard line: “If thou lend money to any of my people that is poor by thee, thou shalt not be to him as an usurer, neither shalt thou lay upon him usury” (Exodus 22:25, KJV; likewise Leviticus 25:35-37 and Deuteronomy 23:19-20). Note who is protected: the poor, inside the covenant community, borrowing to survive (Deuteronomy 23:19-20 widens the ban to any fellow Israelite). A loan to a starving neighbor was charity wearing a contract, and profiting from his desperation was forbidden. Nehemiah 5 shows the ban’s teeth: nobles charging interest and taking children as collateral from famine-struck families are publicly confronted and made to give it back.

That is not a blanket ban on all interest. Deuteronomy 23:20 permits interest on commercial lending to foreigners, and Jesus’s parable of the talents treats bank interest as the bare minimum of prudence: the fearful servant “oughtest” to have put the money “to the exchangers” to earn “usury” (meaning interest; Matthew 25:27, KJV). On the most common modern reading, the scriptural line runs not between interest and no interest, but between commerce and exploitation; the medieval church read these texts far more strictly. Charging the desperate for their desperation, the payday-loan business model, sits on the wrong side of it. See debt and borrowing for the full picture.

The practice

• Find one interest rate you are currently earning (a savings account) and one you are paying or might pay (a card, a loan offer). Write both down side by side. The gap between them is the direction your money is flowing.
• Before any borrowing decision, name what the interest is buying: time you did not want to wait. Sometimes that is worth the price. Say the price out loud first.