Minds On

What is interest?

A kid using a skipping rope.

Student Success

Think-Pair-Share

A jogger is skipping with their skipping rope. The jogger’s friend asks if they can borrow it. In exchange, they will give the jogger an apple every day until they return the skipping rope. Was it worth it for the jogger to lend their skipping rope to their friend?

Explain your thoughts and ideas to a partner. Continue to reflect as you explore the next set of questions.

Note to teachers: See your teacher guide for collaboration tools, ideas and suggestions.

You might be thinking, there must be some sort of incentive to lend one’s skipping rope. It is, in fact, the jogger’s skipping rope. What if it comes back damaged? What if they never get it back? What’s in it for the jogger in this trade? Since the jogger’s friend borrowed their skipping rope, they are indebted to the jogger. Debt means you owe someone something back.

Imagine if the object is not a skipping rope, but money instead. In fact, banks lend money to people. This is called a loan.

A loan is a type of debt. Banks do not loan money for free; they would have similar concerns the jogger had with their skipping rope.

Credit is the ability to borrow money or access goods or services with the understanding that you'll pay later.

Banks need to know that you will return the borrowed amount in a set amount of time. Not only that, but they will also charge a fee.

This fee is called interest and it is calculated using a percentage. If you borrowed $1,000 from the bank, you would need to pay back the $1,000 plus interest.

Together, the three components of debt are:

  • the borrowed amount
  • the interest rate
  • the time to pay it back

Action

How can I calculate interest on a bank loan?

Let’s pretend that you need to borrow money from the bank. The interest on a bank loan right now is 7% which means that whatever you borrow, you will have to pay back 7% more than the borrowed amount, at the set time period of 1 year.

How can you calculate that?

First, a percentage of a number is always out of 100 so that means that 7% = 7 parts of 100. In decimal form, it looks like this: 0.07 (seven hundredths).

Now you need to multiply the number that you are borrowing (Let’s pretend it is $200.00) and the 0.07 together.

200 x 0.07 = 14

This means that you will have to add $14.00 to the $200.00 you borrowed from the bank in one year.

$200.00 + $14.00 = $214.00

So, in one year, when you pay back the borrowed amount plus interest, you will give the bank $214.00.

Calculating interest

Let’s try calculating the interest based on what we just learned.

Borrowed Amount

Interest Rate 8%

It also looks like this 0.08

Total amount

(borrowed + interest)

$300.00

$550.00

$800.00

$725.00

Task

An employee works part time at a local coffee shop. They earn $14.00 per hour and work 5 hours a week. After a month of working, the employee realized that it would take a long time to save for the replacement laptop that they needed for school, which costs $1,000.00. The employee decided to go to the bank to borrow $1,000.00 at 5% interest.

Question: How much money will the employee pay in total? In other words, how much was the borrowed amount plus interest?

Complete the RICE Strategy Organizer in your notebook or using the following fillable and printable document. You may also use a method of your choice.

RICE Strategy Organizer Press the ‘Activity’ button to access the RICE Strategy Organizer. Activity (Open PDF in a new window)

Once you are done, reflect on the following questions according to the work you completed above.

  1. What barriers may prevent the employee from paying back the borrowed amount to the bank?
  2. Could the employee create a payment plan? How might this affect their financial well-being?

Consolidation

Activity

A person at a bank with some paperwork talking to a bank teller.

Create a scenario of your own that includes a need to borrow money from the bank.

In your scenario, be sure to include the following:

  • why you need to borrow money from the bank
  • the borrowed amount
  • the interest rate written as a percentage
  • the time period to pay back the loan
  • the calculations required to determine how much in total you will be paying back
  • when you will be paying the money back
  • where will you get the money to pay back the loan

Record your solution on paper, a document on the computer, an audio recording, using the graphic organizer below, or in an organization method of your choice.

Complete the RICE Strategy Organizer in your notebook or using the following fillable and printable document. You may also use a method of your choice.

RICE Strategy Organizer Press the ‘Activity’ button to access the RICE Strategy Organizer. Activity (Open PDF in a new window)

Reflection question

Could you consider creating a payment plan for yourself to help save the money? What might this look like?

Reflection

As you read through these descriptions, which sentence best describes how you are feeling about your understanding of this learning activity? Press the button that is beside this sentence.

I feel...

Now, record your ideas using a voice recorder, speech-to-text, or writing tool.