Understanding Interest



Understanding Interest

What is interest?

Interest is a term that you hear when working with money. Interest is the amount of money that is paid or earned based on using money.

Most of the time, you will hear about interest when banking. When you put money into a savings account, then the bank calculates how much interest you earn. You earn interest based on the time that the bank has the money.

Interest can also be calculated when working with credit cards. A credit card charges a certain amount of interest when you borrow money from it. Using a credit card is a way of borrowing money. You use a credit card to purchase something and the credit card company loans you the money. They charge you interest for the amount of time that you have borrowed the money until you pay it back. This is why working with credit cards can be very tricky business.

The longer you leave the money in the bank, the more interest accumulates. Because we are working with money, there are different numbers that are involved with interest.

What is principal?

The principal refers to the amount of money that is put into a savings account or is borrowed.

If someone deposits $5000.00 into a savings account, then that is the amount of money that is considered the principle.

If someone uses a credit card for a purchase that is $2000 dollars, then the $2000 is the principal that was borrowed.

Student Loans

A student loan is another time that you will hear the words principal and interest. When a student attends a college, they often borrow money to pay for their schooling. When they borrow this amount, the amount that is borrowed is considered the principle.

Interest earned or paid

Depending on how you are using the money will depend on whether you earn interest or whether you need to pay interest.

You earn interest when you deposit money into a savings account. The bank will pay you a percentage back for the amount of time and the amount of money that you have in the bank. The percentage that the bank pays you back is called the rate.

Rate- the percentage that the bank pays for interest

If we borrow money, then the interest is an amount of money that we pay. The rate is also important here because it will tell you how much you have to pay on the amount that you borrow. A credit card company can sometimes charge as much as 19 or 20% for the amount that you borrow.

The rate has to do with the amount of interest that you are earning or paying.

Example:

If you borrow $250.00 at a rate of 6% per month, how much will you pay?

To calculate this, we have to figure out how much 6% of 250.00 is. Since this is for one month, we don’t need to figure it out over a long time, just for the month.

250 x .06 = _____

Here we wrote the 250.00 simply and converted the percentage to a decimal.

250 x .06 = 15.00

The amount is $15.00.

The time can also be a factor here too. But in this example, we were only calculating the interest for one month so we didn’t really need to worry about time. If this had been for a longer period of time then we would have needed to calculate the time too.

Understanding Interest Worksheet

Directions: Use what you have learned about interest to answer the following questions.

1. If you are putting money into a savings account, do you pay interest or do you earn interest?

2. If you borrow money, do you pay interest or earn interest?

3. If you borrow $450.00 at a 5% interest, how much will you pay in one month?

4. If you borrow $60.00 at 10% interest, how much will you pay in one month?

5. If you put $300.00 in a bank account at 4% interest per month, how much will you earn in one month?

6. How much will you earn at that rate after one year or 12 months?

7. Given the original amount of $300.00, how much will the total amount earned be at the end of 1 year?

8. If you were to take out $150.00 from your savings account at the end of one year, how much money would you have left?

9. If you left that amount of money in the bank for one month, at 4% interest, how much interest would you earn?

10. How much interest would there be at the end of 1 year or 12 months?

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