interest & loan

A loan is when you borrow money from a bank or somewhere else.

eg If you borrow $10,000 from a bank to buy a car.

eg You borrow $500 from your family to repay a bill.

Interest is extra money paid back when you take out a loan from a bank or other lender.

Example

If a bank offers an 8% loan rate and you borrow $1,000 from a bank, 

you need to pay back the $1,000 plus an extra 8% of $1,000.

Simple interest is where you pay a fixed amount of interest on the loan.

Example

Sefano borrows $2,000 from a bank at 8%.

8 ÷ 100 ✕ 2000 = $160

Sefano needs to pay back the $2,000 plus the extra interest of $160, to pay off his loan.

Compound interest is where you pay a variable amount of interest on the loan.

Interest gets calculated on the "current value" of the loan.

Example

In the example below, Sefano has had to pay interest on the new amount every year.