Interest

Interest is a small amount of extra money that grows or is charged when money is saved or borrowed. When someone saves money in a bank, the bank pays them interest for letting it use their money. When someone borrows money from a bank, they pay interest to the bank as a fee for using that money. This simple idea helps connect people who have money with those who need it.

For example, imagine putting $100 in a savings account that pays 5% interest per year. After one year, the bank adds $5 to your account, so you now have $105. This $5 is the interest. The bank uses your savings to lend to others, and the people who borrow pay more interest than you earn — that difference helps the bank make money. In the same way, if you borrow $100 from the bank at 5% interest, you will need to pay back $105 after a year.

Interest can be simple or compound. Simple interest is calculated only on the original amount, while compound interest means interest grows on both the original amount and the interest already earned. Compound interest can make money grow faster over time — this is why many people are encouraged to start saving early.

Interest rates are usually shown as percentages and may change over time depending on the economy. When a country’s central bank changes its interest rate, it affects loans, savings, and spending. Lower rates make borrowing cheaper but saving less rewarding, while higher rates encourage saving but make borrowing more costly.

Throughout history, interest has been part of trade and banking. Ancient merchants used interest to reward lending during long journeys. Today, it plays a big role in the modern financial system, influencing mortgages, student loans, and savings accounts. Understanding interest helps kids see how money grows and why using it wisely matters for the future.