Loan Capital: Interest - SS2 Accounting Lesson Note

Interest is the cost of borrowing money. It is a fee charged by lenders to borrowers for the use of their money. The interest rate is the percentage of the loan amount that is charged as interest over a certain period of time, usually annually.

Interest plays a crucial role because it allows lenders to earn a return on their investment. Lenders provide loan capital to borrowers, and in return, the borrowers agree to pay back the principal amount of the loan plus interest over a set period of time. 

The interest charged on the loan capital is based on several factors, including the creditworthiness of the borrower, the length of the loan term, and the current market interest rates.

A higher interest rate means that the borrower will have to pay more in interest over the life of the loan, increasing the total cost of borrowing. On the other hand, a lower interest rate means that the borrower will pay less in interest, resulting in a lower total cost of borrowing.