The charge made and which the borrower pays for the use of money,1 usually expressed in percentage based on a year, i. e. if $3 is paid for the use of $100 for six months, it is an equivalent to $6 for one year, and is expressed as "6 per cent.," or "6%." Money, like any other commodity, has a value and payment must be made for its rental, or use.
The matter of figuring interest is an arithmetical one hardly necessary to treat of here, but there are several methods of computing the time for which interest is figured, which it is well to understand.
First, the New York Method, which is undoubtedly the correct one. The time is computed by taking the actual number of days elapsed; that is, suppose a note to be dated March 1st; the interest on the same to be computed to July 7th; there would be 31 days in March, 30 days in April, 31 days in May, 30 days in June and 6 days in July, a total of 128 days. After obtaining this result, an interest table is used based on there being 365 days in the year; or, in other words, the yearly interest rate divided by 365 gives the rate for one day. Now this differs from the Boston Method2 (as it is termed in that city) which calls for the use of an interest table based on there being but 360 days in the year, from the fact that the time elapsed is computed as so many months and days, each and every month being accepted as 30 days; 12 times.
1 For the purpose of this definition it is not necessary to distinguish between capital and money.
30 equalling 360. One month, therefore, is figured as 1-12 the yearly rate. Supposing this to be 6%; then the interest for one month would be 1/2 of 1%. From July 5th to September 7th would be reckoned as 2 months and 2 days.
The difference between the New York and Boston methods may be shown in a practical way by computing the interest on, say, $100 for 6 months at 6% per annum. By the former method, supposing the months to be August to January inclusive, the elapsed time would be 184 days, and the result $3. 025. But by the Boston method, which would reckon the elapsed time as 6 months, irrespective of what months, the result would be $3. Again supposing the months to be January to June inclusive, and the year not a " leap year," then the elapsed time would be 181 days or 1 1/2 days less than one half a year by the New York method, but a full half year by the Boston method.
There is a third plan which has not been as yet definitely named, but coming into general use. A sort of combination of the two foregoing. The actual time elapsed is computed by the New York method, the number of days obtained divided by 30, and the 360-day table, as called for in the Boston method, used.
The different methods of computing interest on bonds,1 notes, and other securities, will often account for a variation on the part of two different people figuring the same transaction in accordance with the customs in the two different cities in which the figures are computed.
It is worthy of note that not until the year 1546 was the taking of interest for the use of money legalized in England. The rate was fixed at 10%.
Another use for the word "interest" is in connection with one's ownership in a property. Again, for the speculative side of the market, such as the "long" interest, meaning those long of stock, as explained under "Long."
Remember these facts: midnight ends the legal day, and any loan of money through the midnight hour calls for one day's interest; for illustration, a loan at 5 P. m. on July 5th and repaid early in the morning on July 6th, would be reckoned as one day. This will also make clear that in computing the number of days for which interest runs, the day on which the loan is made is not included in the computation. From July 7th to July 14th is seven days, because seven midnights have passed. July 7th is not included in the reckoning; otherwise it would be eight days.