Interest is money that you get when you put money in the bank. And it’s also money that banks make you pay when you use someone else’s money.
When you put money in the bank, your bank doesn’t leave it lying there. The bank gives it to other people, so they can buy stuff they need, like houses or cars. And the bank makes them pay to use that money.
When you give money to the bank, you get interest. When you get money from the bank, you pay interest.
When you get interest
When you save money and put it in the bank, your bank gives you interest. To make you want to put your money in the bank, they pay you.
When you pay interest
When you put your money in the bank, you’re letting them have it for a while. In turn, they give that money to other people for a while. And make them pay to use that money.
So if you want the bank to give you money, they’ll make you pay interest.
There are two main times when you’ll pay interest.
When the bank gives you money for a short time. Like if you need to buy a car but can’t pay for it all straight away. Or if you need some extra money in the few days before you get paid.
When the bank gives you money for a long time. To buy something big, like a house.
Banks take a chance on you when they give you money. You might not pay the money back! That’s why they make you pay for it in the form of interest. But it means you can buy things you need, without having all the money right now.
Making you pay interest also helps the bank make money.
How much interest you pay
Banks decide how much interest to give you or make you pay by looking at a number of things.
1. Will you pay them back?
Banks will give you money, but make you pay more if they think you might not pay the money back.
2. How you can get the money
When you put your money in the bank, they might give you more interest if you let them have your money for longer.
When you get money from a bank, you might pay more interest if you can get money all the time.
3. What are other banks doing?
Banks look at how much other banks make you pay for getting money, or give you when you save.
4. What the country’s big bank says
The country’s big bank also sets the interest for the entire country. And they put this number up or down to help control how much money you need to buy normal stuff (like eggs).
Other banks use this number to work out how much interest to pay or give you.
If the country’s big bank puts this number up, you usually get more interest when you put money in the bank, and have to pay more when the bank gives you money.
Simple enough, right?
So that’s it – interest explained in the 1,000 most-used words. Would you like to see more of these? What other money things could we explain like this?
We got the idea for this piece from xkcd, and used their simple writer to write it.