Simple Interest

Interest is the amount charged by a lender to a borrower. It means that if you borrow some money from a bank, you have to pay back more than the money you borrowed. Equally, if you have a savings account and deposit some money, the bank will pay you interest as a sort of thank you for saving with them as you are effectively loaning them money. There are 2 main types of interest we need to be aware of. Compound interest and Simple interest. It is important to know the difference between these two, as it can affect how much money you earn or have to repay. For simple interest, you just pay or receive the exact same amount of interest every year. For simple interest, you just pay or receive the exact same amount of interest every year. I borrowed $2000 for 5 years at 4% interest rate per annum. How much interest do I repay? Simply multiply the numbers together. The interest I have to pay is 4 percent of 2000. Simple interest = 2000 X 0.4 X 5 = £400. So after 5 years I have paid £400 of simple interest on the money I loaned. But in reality, banks almost never charge simple interest. They prefer compound interest, which we will learn about in another video.