When it comes to your personal finances, it's important to understand the difference between interest income and interest expense. Here's a look at the key differences between these two types of interest.
Interest income is money earned from investing in a financial product, such as a savings account, certificate of deposit, or bond. When you invest your money, the financial institution pays you interest based on the amount of money you have invested and the interest rate.
Interest expense is the cost of borrowing money. When you take out a loan, you're required to pay interest on the borrowed amount. The interest rate is determined by the lender and is based on a number of factors, including the prime rate, your credit score, and the type of loan.
The key difference between interest income and interest expense is that interest income is money earned from investing, while interest expense is the cost of borrowing money.
Interest income is considered taxable income and is subject to federal income tax. The tax rate on interest income depends on your marginal tax rate.
Interest expense is not tax-deductible. However, there are some exceptions, such as interest paid on student loans and investment property loans.
The main benefit of interest income is that it provides a source of income that is not directly tied to your job. This can be helpful in retirement or if you're looking for a way to supplement your income.
The main benefit of interest expense is that it can help you finance a major purchase, such as a home or car. Interest expense can also help you pay for education expenses.