Written by Sarah Mitchell
Okay, so imagine your friend borrows $10 from you to buy a video game. You're being nice by lending them the money, right? But here's the thing - while your friend has your $10, you can't use it to buy anything yourself.
So your friend says, "Thanks for lending me the money! When I pay you back next month, I'll give you $11 instead of just $10." That extra $1? That's interest. It's like a "thank you" payment for letting them use your money.
Banks work the same way:
When you put money IN a bank: The bank borrows your money and pays YOU interest. So if you put $100 in a savings account, the bank might give you an extra $2 at the end of the year. Now you have $102!
When you borrow money FROM a bank: You have to pay THEM interest. So if you (or your parents) borrow $100 from the bank, you might have to pay back $105.
Interest is basically the cost of borrowing money, or the reward for lending money. The longer someone borrows the money, the more interest they usually have to pay.
It's why savings accounts are cool - you're basically getting free money just for keeping your money in the bank!
Want to see how interest can grow your savings over time? Use our Compound Interest Calculator to see the magic happen!