What Is Interest?
Definition
Money a bank pays you for keeping your money in a savings account, or money you pay a bank for borrowing money (like a loan).
Example: "My savings account earns 4% interest, so my $5,000 earns about $200 a year."
Why It Matters
Interest is the fundamental concept that makes the financial system work. Banks pay you interest on deposits because they use your money to make loans to other customers. In turn, borrowers pay interest to the bank for the privilege of using money now and paying it back later. Understanding interest is essential because it works in two directions: it grows your savings over time, but it also increases the total cost of any debt. The goal is to earn as much interest as possible on savings while paying as little as possible on loans.
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