Interest facts for kids
Have you ever borrowed money or lent some to a friend? Interest is like a small fee you pay when you borrow money. It's also what you get paid when you let someone else use your money. Think of it as the cost of using someone else's money, or the reward for letting someone use yours.
This cost or reward is usually a percentage of the money borrowed or lent. This percentage is called the interest rate. For example, if you borrow $100 at a 5% interest rate, you'll pay an extra $5 for using that money.
Contents
Understanding Simple and Compound Interest
When you deal with interest, there are two main types: simple interest and compound interest. Knowing the difference can help you understand how money grows or how much you might owe.
What is Simple Interest?
Imagine you borrow $100 at a 1% interest rate per year. With simple interest, you would pay $1 every single year. This $1 is never added to the original $100 you borrowed. So, after 10 years, you would have paid $10 in interest ($1 each year), but you would still owe the original $100. Simple interest means the amount of interest stays the same each time.
What is Compound Interest?
Now, let's look at compound interest. Using the same example, if you borrow $100 at 1% interest, you'd pay $1 the first year. But with compound interest, that $1 is added to your original loan. So, in the second year, you'd owe interest on $101, not just $100. This means the interest you pay will be a little more than $1.
This process keeps going. The amount you owe grows slightly each year because the interest gets added to the main amount. Then, you pay interest on that new, larger amount. This makes the total amount grow much faster over time. For example, $100 with 1% compound interest would double to $200 in about 70 years!
The Rule of 72 Explained
The "Rule of 72" is a quick way to estimate how long it takes for something to double in size if it's growing at a steady rate. It's often used for money with compound interest, but you can use it for anything that grows consistently.
Here's how it works: You divide 72 by the annual growth rate. The answer tells you roughly how many years it will take for the amount to double.
- If something grows at 1% a year, it will double in about 72 years (72 / 1 = 72).
- If a kangaroo grows 10% a year, it would double in size in about 7 years (72 / 10 = 7.2).
- If it grew 7% a year, it would take about 10 years (72 / 7 = 10.2).
This rule is a helpful shortcut for understanding how growth rates affect doubling time.
What is Usury?
Sometimes, charging interest on a loan has been seen as wrong or even illegal. In the past, and in some places today, certain religious rules or laws made it against the rules to ask for interest.
When the interest a person has to pay is extremely high, it's called usury. This means charging an unfair or excessive amount of interest. Today, even if charging some interest is allowed, usury (charging too much) is often illegal. Laws are in place to protect people from being charged incredibly high interest rates that they can't afford to pay back.
Images for kids
-
A bank sign in Malawi listing the interest rates for deposit accounts at the institution and the base rate for lending money to its customers
-
An old woodcut showing "Usury" (charging too much interest) by Albrecht Dürer.
-
An old woodcut by Lucas Cranach the Elder showing "Christ drives the Usurers out of the Temple."
See also
In Spanish: Interés para niños
