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In Finance, what is Vested Interest?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 22 September 2016
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    Conjecture Corporation
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In the world of finance, vested interest is a term that can apply in two distinct ways. First, the term can refer to the degree of involvement that an individual or business has with another individual or business, a specific action, or a contractual commitment. Vested interest can also apply to the rights of an individual in regard to current and future access to some type of property, tangible or intangible. In both scenarios, the goal is usually aimed at securing some sort of return or benefit that cannot be taken away and can be claimed by the recipient at some point in the future.

One example of a vested interest can be found with a retirement plan. Many employers that provide pensions and other plans for their employees normally require that certain criteria are met before the employee can become vested in the program. With some companies, the employee must successfully complete the first ninety days of employment, sometimes known as the probationary period. At that point, the employee begins the process of becoming vested in the retirement plan. Often, the vesting period may take up to five or six years before the employee is fully vested, and thus locks in some sort of retirement benefit that remains in place even if he or she chooses to leave the company after achieving the fully vested interest.

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Once fully vested, disbursements from the pension take place based on the provisions found in the pension agreement. This often involves limiting the percentage of funds that can be drawn out of the pension on an annual basis, once full vested interest is achieved. Many plans also include a provision that prevents the employee from drawing on the funds until he or she reaches a certain age, such as fifty.

A vested interest may describe the degree of confidence that a lender has in the ability of a borrower to repay a loan according to the terms of the loan contract. For example, a bank or mortgage company has a vested interest in the ability of a client to make the monthly mortgage payments on time and in accordance with the terms and conditions of the mortgage agreement. As the payments are submitted, the lender benefits from the timely receipt of those payments. The borrower also has a vested interest in repaying the mortgage according to terms, since doing so helps to increase his or her credit rating, and also carries the benefit of gaining additional interest or control in the ownership of the property. Once the mortgage is paid in full, the borrower has a full vested interest in the property, and can choose to benefit by living on the property, or earning a profit by selling the property for significantly more than the total of the original mortgage.

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