What is Interest?
01.Money Rental Fee
Think about renting a bicycle. You pay a fee to use the bicycle, and then you return it. Interest is the rental fee for money! If you borrow money from the bank, you pay the bank interest. But if you save money in the bank, the bank borrows your money, so the bank pays YOU interest.
02.Simple Interest: The Flat Growth
Simple interest is calculated only on the money you first put in (called the principal). If you put $100 in a bank account that pays 10% simple interest every year, you will earn $10 every year. Year 1: $110. Year 2: $120. Year 3: $130. It grows, but it grows at a flat speed.
03.The Cool Thing About Banks
In real life, banks don't use simple interest. They use something much more magical called compound interest. Let's see how it works!