Interest in banking is the extra money a borrower pays to a lender for using their funds, or the reward a bank pays to a customer for depositing money into an account.
How Interest Works
• Cost of Borrowing: When you take out a loan, mortgage, or use a credit card, you pay the bank a fee calculated as a percentage of the amount you borrowed (the principal).
• Reward for Saving: When you put money into a savings account or certificate of deposit (CD), the bank pays you interest because they use your deposited funds to issue loans to other customers.
Types of Interest
• Simple Interest: Calculated only on the original principal amount.
• Compound Interest: Calculated on the original principal plus any accumulated interest from previous periods, allowing your balance to grow faster.
• Fixed vs. Variable Interest: Fixed rates stay the same throughout the life of the loan or account, while variable (or floating) rates can change over time based on market conditions.