Learn the basics of interest, how you earn interest, and compound interest. An introduction to interest rates.
Use this video lesson on the topic to discuss the terminology and basic economic and related concepts of
- Interest Rates
- Bank Loans
Hand out the worksheet below (see the GET LESSON button near the bottom of the page).
Show students the video and have and have them complete the worksheet. Then have a discussion about interest and how it relates to money, saving, and borrowing. Review the questions on the worksheet.
What is Interest?
The cost of borrowing money or the amount you receive for lending money is called interest. Interest is usually expressed as an annual percentage of the loan amount. This is the interest rate. It’s simply the cost of borrowing money from someone else.
How do you earn interest?
When you deposit money into an interest-bearing account such as a savings account, you earn interest. Banks do the lending of account deposits. They use your money to make loans and invest. Banks earn money and pass some of it to you as interest.
The bank will pay interest on your savings every month, or quarter and your account will be credited with interest payments. You will see the transaction and notice an increase in your balance. You then have two options: withdraw the money or keep it in your account to continue earning interest.
You can earn interest if you save money. For example, you can earn $30 more interest if you deposit $1,000 to an account that earns 3% interest. If you only use simple interest, after a year you will have $1,030 in savings.
When you keep the interest in your savings, it can really help to build your account balance. Both your original deposit and the interest you earn on it will earn interest. This is called Compound interest, which is the addition of interest earned on the interest.
Interest is something you also pay if you borrow money. To compensate the lender for lending you money, you will need to repay more of what you borrowed. The lender will assess you as more risky and you will pay higher interest rates if you borrow money for a longer period of time.
To give you an example, a loan to purchase a car will result in you owing the loan amount, also known as the principal, and the interest charges by the lender. For example, if your car loan is $10,000 at 5% interest, then you will have to repay $10,000 and pay the lender $500. The total then is $10,500. This amount will be repaid over time by you to your lender.
Simply put, interest is the cost of money. If you’re borrowing or lending money, it is important that you fully understand the concept of interest.