Eli5 Interest Rates

What does high interest or low interest mean and why should I care?

Interest is the extra money that gets added when you borrow money, or the extra money you earn when you save money. It is like a small reward or a small cost, depending on which side you are on. Imagine you borrow a toy from a friend. Your friend says you can use the toy, but tomorrow you must give it back and also give them a sticker. That sticker is like interest. You borrowed something, so you pay a little extra for using it. Money works the same way.

When you borrow money from a bank, like for a house, a car, or a credit card, the bank charges interest. The bank is lending you their money, so they want something extra in return. The interest is how the bank makes money. If the interest rate is high, you pay back a lot extra. If the interest rate is low, you pay back only a little extra. Now think about saving money. Imagine you give your money to a bank to hold onto it safely. The bank uses your money to help other people borrow. To say thank you, the bank gives you extra money over time. That extra money is also called interest. In this case, interest is a reward for saving instead of spending.

Interest rates are just numbers that tell you how big the extra amount is. A low interest rate means the extra amount is small. A high interest rate means the extra amount is big. If a savings account has a higher interest rate, your money grows faster. If a loan has a higher interest rate, your debt grows faster. Interest rates affect the whole world. When rates are low, people borrow more money and spend more. They buy houses, cars, and toys. When rates are high, borrowing feels expensive, so people spend less and save more.

Governments and central banks change interest rates to control how fast money moves. If people are spending too much and prices rise fast, rates go up. This is when people start worrying about inflation. If people are not spending enough and businesses struggle, rates go down. So interest is just the price of using money over time. Sometimes you pay for it. Sometimes you earn it. It all depends on whether you are borrowing or saving.