When a rate of interest is named in a loan contract it often covers elements which are, strictly speaking, not interest at all. Where a capital good is loaned which is to be returned it often happens that the good is not in as good condition when it is returned as when it was loaned. It is partly worn out from use. A payment for wear and tear is therefore exacted and this payment is included in the contract rate of interest although it differs essentially from interest. Also, where there is an element of risk - a danger that the principal will not be returned, a charge is likely to be made to cover this risk and this charge is included in the contract rate of interest although it is essentially an insurance premium and not interest.

Again, as in the pawnbroking business, where small loans are made and a great deal of care must be given to looking after the character of the security, the contract interest rate contains an element which is really wages paid for the trouble of conducting the office. As a result of recent legislation in the District of Columbia restricting the rate of interest that might legally be charged, at least one money lender who formerly conducted a pawn office in Washington has erected an office across the Potomac in Virginia for the benefit of his clients. He furnishes them free automobile service across the river to his Virginia office and there makes the loans to them. Manifestly the cost of the automobile service is included in the contract rate of interest. All of these foreign elements must be deducted, however, before we reach the net rate of interest. The net rate of interest is best seen in loans of money in large sums on perfectly safe security and for long periods of time.