Gross Interest
Candlefocus EditorWhen discussing a loan or investment, the gross interest rate is the rate that is quoted when talking about different products or services. It is the rate advertised by a lender and the rate investors are generally familiar with. Interest that is earned on deposits or income sources such as bonds is typically based on the gross amount.
The actual amount of net interest that is earned or paid on a loan or investment is determined after all of the add-on fees, taxes, and other costs are accounted for. For instance, if a borrower is promised a gross interest rate of 5%, and taxes must be paid on that interest at a rate of 25%, the total net interest earned would be 3.75%. Businesses must consider the fact that they may need to pay taxes on some form of interest earned or pay more interest on loans due to tax costs.
Gross interest is most commonly used when talking about a loan or investment and the rate quoted will almost always be the gross interest rate. It does not factor in the additional costs or taxes which can significantly reduce the amount of interest received or increase the amount of interest paid. When considering a loan or investment opportunity, it is important to determine the actual amount of net interest to understand the true cost of a loan or return of an investment.