So to work out how much you owe at the end of the second year, its 10% of all of that. Steph McGovern: So for the first year after borrowing £1000 you owe £100 interest. And that’s down to something called compound interest interest on top of interest. So at the end of 5 years you owe a grand and a half, right? Wrong. 100 x 5 for 5 years that’s £500 of interest. So say you borrow £1000 at 10% per year, how much would you pay back after 5 years? Well 10% of £1000 is a 100. Steph McGovern: So what if you need to borrow some money? If a bank lends you money the'll want you to give them interest. That’s an interest rate of 1%, which is just another way of saying 1 for every 100. Steph McGovern: If you put £100 in the bank and leave it for a whole year, they might give you £1 in interest. And it works both ways, so when you put money in a bank your lending them cash so they might give you back interest too. So that extra bit you pay, they call it interest. This is basically the kind of deal you can make with a bank when you want to borrow money. So you'll lend me a tenner and I’ll give you £11 back next week, that’s a good deal isn’t it? Steph McGovern: Hey can you lend us a tenner? Go on, go on, I’ll pay you back next week and I’ll tell you what I’ll even give you some extra money to say thank you.
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