What is interest? Think of money as something you can "rent."
When you take out a loan, you pay extra for using money that isn't yours: that's interest. When you save money in a bank, the bank pays you extra for using your money: that's also interest!
To understand it better, let's break it down with the tool below. Imagine all your money is a large block divided into 100 equal parts. Each of those parts is 1%. The "interest rate" is simply the number of those parts you earn (or pay) in a period of time.
Try it Yourself Visually
Enter your principal and an interest rate to see how interest is calculated per unit of time.
Enter a principal and a rate to see the magic.
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