[Dimitroff]

Interest

or how much is paid for the use of money

An intro about the interest (or how much is paid for the use of money). Well here we go, the interest it is how much is paid for the use of money (as a percent, or an amount).

Usually, money is not free to borrow; it costs to borrow money. Different places charge different amounts (at different times). They do it as a percent (per some period of time -- week, month, year...) of the amount borrowed. And it's called "interest".

Example: Borrow $ 1000 from the bank

Jim wants to borrow $1000. The bank says "10% Interest". So to borrow the $1000 for 1 year will cost $100 (because $1000 × 10% = $100).

[SEO]

Well, the interest is $100, and the interest rate is 10% (but people often say "x% interest" without saying "rate").

And of course, Jim will have to pay back the original $1000 after one year, so this is what happens: Jim borrows $1000, but he has to pay back $1100. This is the idea of interest -- paying for the use of the money.

And this example is just an indeal, imaginary case, because it is just a simple full year loan, but the banks often want the loan paid back in monthly amounts, and they also charge extra fees too. Once I wanted to have this kind of one year loan but one of the managers over there explained it so -- I should start to pay them back soon (after a month, with monthly amounts; they're not going to wait me 12 months). And so, I refused it.

[Dimitroff]

Some specific words.

1. About the loan: loan, principal (those $1000; i.e. it is the initial size of a loan), borrower (Jim), lender (the bank).

2. About the repayment: interest (those $100).

Let's see what's going on if there is a more than one year case. What about if Jim wants to borrow the money for 2 years?

A simple interest case.

If the bank charges "simple interest" then Jim just pays another 10% for the extra year. Simple, isn't it? Jim pays Interest of ($1000 × 10%) x 2 years = $200. (Plus the principal of $1000 means that Jim needs to pay $1200 after 2 years.)

By the way, there is a formula for simple interest. It is

I = Prt

where

I = interest
P = amount borrowed (the "principal")
r = interest rate
t = time.

Easy, right? Another example: Example: Amy borrowed $3000 for 4 Years at 5% interest rate, so how much interest is that?

I =   $3000 × 5% × 4 years (I = 3000 × 0.05 × 4)
I =   $600

[SEO]

Yeah. But banks almost never charge simple interest, they prefer compound interest.