Why do banks pay interest on loans?

Economy of the United States

Why do banks pay interest on loans?

Imagine you borrow money from a friend to buy a new bike. You agree to pay them back with extra money as a thank-you for lending you the cash.

Banks lend money and expect more than what they lend. The extra money is called interest. Interest is like a thank-you for using their money.

Example

If you borrow 100 and agree to pay back 110, the extra $10 is interest.

Remember this

Interest is the extra cost for borrowing money.

Text adapted from Wikipedia, licensed under CC BY-SA 4.0.

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Educational content, not financial advice.

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