Interested By Interest?

What is Interest?  When you take out a loan you will have to pay back the amount you borrowed and some extra money called interest.  This interest is the charge for borrowing the money.

Interest is quoted as a percentage.  Here is an example to demonstrate how interest works when taking out a loan.

Oscar borrows £10,000 from his bank to buy a new car and the interest rate on the loan is 6%.  Can you see how much money Oscar has to repay to the bank?

6% of £10,000 is £600.

Oscar will have to repay a total of £10,600 to the bank

Why do we have to pay Interest?  The payment of interest is compensation to the lender to:

1. Cover the risk of the loan not being repaid.
2. Cover the cost of profits that could have been made investing the money elsewhere.

Why do I get Interest on my savings?  In the same way we can borrow money from banks they also borrow money from us.

When you have money in your savings account the bank uses it to lend to others.  The bank pay you interest for borrowing your money!