Officially, banks and other financial institutions are the ones who can lend money. They offer loans to anyone they find reliable enough to pay it back on time whether it’s people, companies, businesses, or even organizations.
What is the benefit for the lender? The lender gives the loan with the expectation of getting an additional amount known as interest.
Let’s understand with an example –
Say you take a loan of Rs. 50,000 for three years with an annual interest rate of 4% from a bank.
You have to pay back Rs. 53,143 instead of Rs. 50,000 that you borrowed.
Here, the additional Rs. 3,143 paid back to the bank is the interest paid by the borrower for the loan.