Glossary > Finance > Personal Finance > Savings Accounts

Interest

Interest is money paid by a borrower to a lender for the privilege of using their money. In the context of personal finance and savings accounts, interest is the amount earned on the money you deposit in a savings account or investment.

Example #1

For example, if you deposit $1,000 in a savings account with a 2% annual interest rate, you will earn $20 in interest over the year.

Example #2

If you take out a loan for $5,000 with a 10% annual interest rate, you will need to pay $500 in interest over the year.

Misuse

A common misuse of interest is when predatory lenders offer loans with extremely high-interest rates, trapping borrowers in cycles of debt. It is crucial to protect consumers against predatory lending practices to prevent individuals from falling into spiraling debt traps that can be difficult to escape.

Benefits

One of the benefits of interest is that it allows your savings to grow over time without you having to do anything actively. By earning interest on your savings, you can increase your wealth and achieve your financial goals faster.

Conclusion

Understanding how interest works is essential for consumers to make informed decisions about borrowing money, saving, and investing. By being aware of the risks of high-interest debt and the benefits of earning interest on savings, individuals can protect their financial well-being and work towards their financial goals.