Interest

When you borrow, interest is the price you pay for using someone else's money. When you save or lend, interest is what you earn for letting someone else use yours. A bank pays interest on savings because it lends that money to other customers at a higher rate.

Interest is usually set as an annual percentage, called the interest rate. If you borrow 10,000 at 6% a year, you pay about 600 in interest over a year if the full amount remains outstanding.

There are two main ways interest is calculated. Simple interest is charged only on the original amount. Compound interest is charged on the original amount plus any interest already added, which makes balances grow faster over time.

Interest rates reflect several things: how risky the borrower is, how long the money is borrowed for, expected inflation and the general level of rates set by the central bank. When central banks raise rates, borrowing becomes more expensive and saving becomes more rewarding.