Gross Net Interest
1. Gross interest
Gross interest is the whole amount that borrower has to pay while net interest is that portion of the gross interest which is paid simply for the use of capital. Thus gross interest is the total amount of interest paid by the borrower to lender. The creditors' gets interest because he has got the sense of waiting and the borrower pays him interest because he gets an advantage of productivity from that capital.
Main constituents of gross interest: the following are the main constituents of gross interest:
(1) Net interest; it is a payment for the use capital as such only or a payment for the borrowing money.
(2) Payment for inconvenience: some extra charge is made the payment of the debt at the right time. (ii) He may make the payment at such a moment when he may not be able to invest his money in some other business. (iii) In the same way he may not get his money back at the right time and he may suffer on account of his delay.
(3) Charges for his management: the creditor has to keep a person an office and some other liabilities to deal with his debtors. There may arise occasions when there is the need of sending reminders making personal approaches and legal proceedings against the debtors for recouping the money lent for this reason they make an extra charge of interest.
(4) Insurance against risk: it is guesses that some of the debtors may not be in a position to return the debt taken due to dishonesty or due to the failure of his business. The creditors cover this risk by charging something extra from the debtor. These risks are of two kinds. (a) Personal risks: it may arise on account of unrealistic character of the borrower itself. And (b) Trade risk: it arises on account of the unrealistic varying fortune of the business in which the money is invested. The greater this type of risk the higher will be the insure money.
2. Net interest
The net interest is the price paid for the services of capital employed. Net interest is that part of the gross interest which is paid for the use of capital. The few definitions of the gross interest may be given below:
Mill: "net interest is the payment from that involved saving and no work simply on the lender."
Chapman "net interest is that portion of the gross interest which is paid simply for the use of capital."
Moreland "net interest is that portion of the gross interest which is paid simply for the use of capital."
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