Money Basics

All about interest

If you borrow money from a bank or other institution, you must pay interest on that loan. In this case, interest is the amount paid for the use of money. For example, you pay interest when you obtain a mortgage loan or put charges on a credit card.

When you deposit money into a bank, interest is the return earned on an investment. The bank pays you interest for allowing it to temporarily use your money to loan to others.

While some checking accounts pay interest, banks primarily attract customers by paying interest on money kept in savings accounts.

Interest is calculated as a rate, such as 5 percent or 10 percent. The amount of interest you earn on a savings account is determined by multiplying the principal—the money you deposit—by the rate of interest. Banks typically calculate interest and add it at the end of a certain time period. Interest can be compounded annually, semi-annually, quarterly, monthly, weekly, and even daily.

For example, if you put $100 into a savings account that pays 5 percent every quarter, you will earn $5 in interest at the end of the quarter.

Of course, if you make regular deposits into a savings account, your money will earn more interest.

For more help determining decimals and percentages, review our Decimals and Percents tutorials in our Math section.