How does interest work?

Say you want to try surfing for the first time, but you don't have a board. You could buy one, of course. But what if you try it and hate surfing. You'd be stuck with an expensive fiberglass decoration. So instead, maybe you rent one from a surf shop. In exchange for using a board for a period of time, you'd pay the shop a rental fee.

A similar concept exists in the financial world. When you borrow money through a loan or use a credit card, you're essentially renting money from a bank or other financial company, just like you rented that surfboard. But instead of being charged a rental fee, you're charged interest. How much interest you'll pay depends upon a number of factors, including what interest rate you're given, and how long you borrow the money for.

On the flipside of the coin, you can earn interest too. When you put your money into an interest-bearing account, like a savings account, you're the one who collects the interest. Because even though you may be putting the money away for safe keeping, you're essentially renting your money to a bank. In exchange they'll pay you interest. They do this, because they need your money to fund all the other bank-y things they do, like lending money to homeowners through mortgages. Interest is an important financial concept to know. Whether you love it or hate it probably depends on whether you're the surfer paying the fee or the surf shop owner collecting it.