ELI5: What is interest?

6 views Mar 3, 2026 2 min read

Interest is like a fee you pay for borrowing money, or money you earn for letting someone else use your money.

Imagine you want a toy car, but you don't have enough allowance right now. You ask your older sibling to lend you $10.

  • If you agree to pay them back $11 next week, that extra $1 is interest. You're paying them for the privilege of having the money now instead of waiting. It's like renting their money!
On the other hand, imagine you have a piggy bank full of money. Your parents say they will hold onto it for you in a special savings account.
  • If, after a year, your parents give you back your original money plus a little extra, that extra money is also interest. This time, you're earning money because you let the bank (represented by your parents) use your money. They are paying you for the privilege of using your money.
Think of it like this:
  • Borrowing: Interest is the cost of borrowing money.
  • Saving: Interest is the reward for saving money.
So, interest can be something you pay, or something you receive, depending on whether you are borrowing or saving money. It's a way of making sure things are fair when money changes hands over time. The amount of interest usually depends on how much money is involved and how long the money is being borrowed or saved. A bigger amount of money or a longer time usually means more interest.

Related Questions

What is interest and why do banks charge it? Why are interest rates so high Why do banks give interest on savings?

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