In this blog post money math made easy, we are trying to simplify the process of interest. Interest is a concept in the financial arena that involves money. It’s a way for lenders, like banks or individuals, to make money when they lend to borrowers, like people or businesses.
When you borrow money, let’s say you take a loan from a bank, the bank usually charges you interest. Interest is an extra amount you must pay back along with the original amount you borrowed. This extra money is the cost of borrowing the bank’s money.
The interest rate is the percentage that determines how much extra money you must pay back. For example, if you borrow $100 from the bank and the interest rate is 5%, you must pay back the $100 you borrowed plus an extra $5 as interest.
The interest rate can be fixed or variable. A fixed interest rate stays the same throughout the loan period, so you know exactly how much you’ll pay back each time. A variable interest rate can change over time, usually based on market conditions or other factors.
On the other hand, if you save your money in a bank account, the bank will pay you interest in keeping your money with them. This is called earning interest. The bank will use your money for various purposes, like lending it to others, and in return, they will give you a small percentage of your savings as interest.
Interest is a crucial concept that plays a significant role in both borrowing and saving money. It enables lenders to generate income and savers to earn returns on their investments. Understanding how interest works is essential for making informed financial decisions and achieving your long-term financial goals.