Assuming you mean financial interest, it works like this:

You start with £100 which you have deposited in a bank.

You get 5% interest per year.

After the first year you have £105, that's 100 * (1 + 0.05)

After the second year you have £110.25, that's 100 * (1 + 0.05)^2

After the third year, you have £115.76, that's 100 * (1 + 0.05)^3

And so on.

The bank pays you interest in order to incentivise you to put your money in the bank. The bank can then lend this money out to other people and make a profit from the difference between the loan interest (that the bank gets from the person with the loan) and the savings account interest (that the bank pays out to you).

Banks help the economy by strongly encouraging everyone to lend their money somewhere useful rather than stuff it under a mattress and have it do nothing.

Obviously there's a lot more to finance. Has that helped? What specific thing were you confused about?

Interest is just the cost of borrowing. If you ask to borrow 10 bucks, I might ask you to pay me back 11. That $1 is the interest.

Interest is usually expressed in annual percentages, like 20% a year. So if you borrow $100, in 1 year you would owe $120. After another year it would be $120*1.2 again, or $144.

But then it gets more complicated, when you factor in compounding. Compounding refers to how many times the interest is calculated. Is it 20% 1 time per year? Or is it 20%/12 each month? Or maybe it's 20%/52 every week. As it turns out, the more times you compound the interest, the more interest you will end up owing annually. So this is an important factor. (Most loans are monthly)

Tim needs to borrow $200 from me, and he wants to pay me back in a month. I don't get anything out of it so I say no. So Tim sweetens the deal, says he'll pay back the $200 plus 10% interest ($20). So I say yes to the deal. The 10% is interest.

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