Interest and borrowing — Economics, 11–13 years
Interest is the extra money paid for using someone else’s money, or earned for letting others use yours.
The price of time
Borrowing lets you use money now and repay it later. Interest is the extra amount for waiting and for the risk that repayment may fail. Saving is the other side: you let an organisation use your money, and interest can be your payment.
Why charge interest?
Someone who lends money cannot use it elsewhere during the loan, and may not get it back. Interest grew from this problem of sharing money across time: it rewards the lender and helps compare different offers. A clear rate also shows how costly a loan may become.
A simple loan
You borrow 100 euros for one year at 5 percent simple interest. First calculate 5 percent of 100: 0.05 times 100 equals 5 euros. Add that interest to the original 100 euros, so the repayment is 105 euros. The rate and time both matter.
The small percentage
A rate such as 5 percent can look tiny, especially when the amount is shown weekly or monthly. But interest applies to the amount borrowed, and longer time can add more charges; some loans also charge fees or compound interest. Always check the total repayment, not just the rate.
Borrowing in real life
Banks may lend for a home, education or a business, while people use smaller loans for purchases. Shops sometimes offer “pay later”, but the total can include interest or fees. The same idea works for savings: compare the return with how long your money stays deposited.
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