Gross and Net Interest
Gross interest includes the following elements besides net interest.
Payment for Risk
Lending money is a question of risk. The risk arises due to the non repayment of the loan by borrower due to his bankruptcy or dishonesty. As an insurance against risk, gross interest is higher.
Reward for Management
The lender incurs expenditure for the management of his loan. Records of loan have to be maintained. He may write letters or send messenger to the borrower for the repayment of the loan. In some cases, recourses have to be taken for legal measures. All these involve cost for which a charge is made. This makes gross interest higher.
Payment for Inconvenience
The lender faces many inconveniences after giving the loan. He might feel the necessity of money after the loan is given. The borrower may not repay the loan in time. For these difficulties, he charges higher rate of interest.
