What does the term "interest" mean in personal finance?

The term "interest" in personal finance primarily refers to the cost of borrowing money or the income earned from savings. When individuals borrow funds, such as through loans or credit cards, they are typically required to pay interest as a fee for the privilege of using someone else's money. This cost compensates the lender for the risk and opportunity they forgo by lending their money.

Conversely, when saving money in a bank account or other investment vehicles, interest represents the income earned on that saved amount. Banks pay interest to depositors from the funds they use to lend to others, creating a dual perspective on the concept of interest—it's a cost when borrowing and a return when saving. This dual nature of interest provides a central foundation for understanding how savings and loans operate within personal finance.