SACRAMENTO, Calif —
A lot of loans and credit cards come with interest, but not a lot of people understand what means.
Interest is an extra charge on borrowed money or assets. When you take out a loan or open a credit card, you have to eventually pay that money back plus the interest you accrued.
Now, interest is a bit confusing, so let’s break it down. Interest is a percentage based off of how big the loan is and how much risk you are. So if the person or business lending you money thinks you’re low risk — as in you can pay the money back on time — the rate should be lower than if you were labeled high risk — a person who's not as reliable to pay back the loan.
Here's an example: If you have a $30,000 loan with 15 percent interest that you want to pay back in 10 years, then you would take 30,000 x 0.15 x 10, which equals 45,000. So, for that $30,000 loan, you’d end up paying $45,000. That’s simple interest.
You might be wondering why interest is even a thing because you're going to pay your lender back, right? Well, the reason lenders assign interest is because those lenders could've done something with that money, like invest it, but instead, they chose to lend it to you instead. It's also an incentive to pay back your loan quicker, so the interest you pay is lower in the end.