Interest on a Loan
When you borrow money, you may have to pay interest as well as paying back what you borrowed.
Borrowing $100
This is a simplified example — real loans work a bit differently, but the basic idea is the same.
Not every loan is identical
Real loans can have different interest rates, different repayment periods, fees, and different repayment structures. We won't go into all of that here — just know that loans can differ quite a bit from each other.
💰 Saving
A bank may pay you interest for keeping money with them.
🤝 Borrowing
You may pay interest to the lender for the money you've borrowed.
Same idea — interest — but which way it flows depends on whether you're saving or borrowing.
Interest isn't random
Lending money involves risk for the lender, and lenders generally charge interest for providing money over time. That's the simple reason interest exists on borrowing.
The cost of borrowing $50
You borrow $50. The agreement says you'll repay $55. How much did borrowing cost you?
$5 — that's the cost of borrowing in this simplified example.
The interest rate alone doesn't tell you whether a loan is good or bad. The total cost, the repayment period, and whether you can actually afford the repayments all matter too.
This lesson prepares children for understanding real-world borrowing later in life — it's not meant to be a complete guide to loan products.
Where to next
More on debt and repayments.