In this lesson, we're going to be talking about finance. And
one of the most important aspects of finance is interest.
When I go to a bank or some other lending institution
to borrow money, the bank is happy to give me that money. But then I'm
going to be paying the bank for the privilege of using their money. And that
amount of money that I pay the bank is called interest. Likewise, if I put money
in a savings account or I purchase a certificate of deposit, the bank just
doesn't put my money in a little box and leave it there until later. They take
my money and lend it to someone else. So they are using my money.
The bank has to pay me for the privilege of using my money.
Now what makes banks profitable is the rate
that they charge people to use the bank's money is higher than the rate that they
pay people like me to use my money. The amount of interest that a person pays or
earns is dependent on three things. It's dependent on how much money is involved.
It's dependent upon the rate of interest being paid or the rate of interest being
charged. And it's also dependent upon how much time is involved. If I have
a loan and I want to decrease the amount of interest that I'm going to pay, then
I'm either going to have to decrease how much money I borrow, I'm going to have
to borrow the money over a shorter period of time, or I'm going to have to find a
lending institution that charges a lower interest rate. On the other hand, if I
want to earn more interest on my investment, I'm going to have to invest
more money, leave the money in the account for a longer period of time, or
find an institution that will pay me a higher interest rate.