What Is Interest-Bearing Debt?

What Is Interest-Bearing Debt?
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Why Charge?

The main reason lenders charge interest is because they are profit-making entities. Lending money is an investment, and interest is the return on that investment. In this way, they are just like any other business -- they acquire a product (capital) for which there is low supply and high demand, and sell it for a profit. When a lender lends money, it is actually selling that money at a profit, which manifests itself as interest.

Deferred Interest

Debt with deferred interest is debt where the borrower is not obligated to pay the interest until a certain period. This means that rather than shrink with each payment, the amount of debt -- and interest, which is a percentage of that debt -- increases.

Fixed Interest

Interest-bearing debt with a fixed interest rate has a rate that does not change over the course of the payback period. This means that monthly costs are fixed.

Variable Interest

The interest rate on a variable interest-bearing debt is subject to change over the course of the loan. This means it can be lower than a fixed-rate loan but it can also be substantially higher, and monthly payments are not fixed.