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Interest Expense vs Interest Income: What's the Difference?

When it comes to your finances, it's important to understand the difference between interest expense and interest income. Here's a look at the key differences between these two concepts.

What is interest expense?

Interest expense is the cost of borrowing money. When you take out a loan, you're typically required to pay interest on that loan. The amount of interest you pay depends on the interest rate and the amount of money you borrow. Interest expense is typically tax-deductible, which means you can deduct it from your taxes.

What is interest income?

Interest income is the money you earn from investing in things like savings accounts, bonds, and other investments. The amount of interest you earn depends on the interest rate and the amount of money you invest. Interest income is typically taxable, which means you'll have to pay taxes on it.

The difference between interest expense and interest income

The key difference between interest expense and interest income is that interest expense is the cost of borrowing money, while interest income is the money you earn from investing. Interest expense is typically tax-deductible, while interest income is taxable.

How to calculate interest expense

To calculate your interest expense, you'll need to know the interest rate and the amount of money you borrowed. The interest rate is the percentage of the loan that you'll have to pay in interest. The amount of money you borrowed is the principal. To calculate your interest expense, you'll multiply the interest rate by the principal. For example, if you borrowed $100 at an interest rate of 5%, your interest expense would be $5.

How to calculate interest income

To calculate your interest income, you'll need to know the interest rate and the amount of money you invested. The interest rate is the percentage of the investment that you'll earn in interest. The amount of money you invested is the principal. To calculate your interest income, you'll multiply the interest rate by the principal. For example, if you invested $100 at an interest rate of 5%, your interest income would be $5.

The bottom line

Interest expense and interest income are two important concepts to understand when it comes to your finances. Interest expense is the cost of borrowing money, while interest income is the money you earn from investing. Interest expense is typically tax-deductible, while interest income is taxable. To calculate your interest expense, you'll need to know the interest rate and the amount of money you borrowed. To calculate your interest income, you'll need to know the interest rate and the amount of money you invested.

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