Steph McGovern: Hey can you lend us a tenner? Go on, go on, I鈥檒l pay you back next week and I鈥檒l tell you what I鈥檒l even give you some extra money to say thank you. So you'll lend me a tenner and I鈥檒l give you 拢11 back next week, that鈥檚 a good deal isn鈥檛 it?This is basically the kind of deal you can make with a bank when you want to borrow money. So that extra bit you pay, they call it 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.
Steph McGovern: If you put 拢100 in the bank and leave it for a whole year, they might give you 拢1 in interest. That鈥檚 an interest rate of 1%, which is just another way of saying 1 for every 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. So say you borrow 拢1000 at 10% per year, how much would you pay back after 5 years? Well 10% of 拢1000 is a 100. 100 x 5 for 5 years that鈥檚 拢500 of interest. So at the end of 5 years you owe a grand and a half, right? Wrong. It鈥檚 more complicated than that. And that鈥檚 down to something called compound interest; interest on top of interest.
Steph McGovern: So for the first year after borrowing 拢1000 you owe 拢100 interest. So add them together, that鈥檚 拢1100. So to work out how much you owe at the end of the second year, its 10% of all of that. Which comes to 拢110, so at the end of the second year you owe 拢1000, plus the first year's interest 拢100, plus the second year's interest which is 拢110, and that gives you a total of 拢1210. The third year鈥檚 interest is now 10% of all of that. Which is 拢121.
Steph McGovern: So after 3 years it鈥檚 a 拢1000 plus 拢100 for the first year鈥檚 interest, 拢110 for second year's, and a 拢121 for the third year鈥檚 interest. That gives you a total of 拢1331. Keep going like that and after 5 years you owe 拢1610.51. The higher the interest rate, the faster the cost mounts up, but it鈥檚 difficult to calculate isn鈥檛 it?
Steph McGovern: Some loans are worked out by the month or even the day, which makes comparing them even harder. That鈥檚 why the law says that all loans should be advertised with the yearly figure. So we can work it out, it鈥檚 called an APR - annual percentage rate. That should make it easier to compare loans and work out which ones are cheaper.
Steph McGovern: So before you borrow It鈥檚 important to make a plan for how you鈥檙e going to pay it back.
Video summary
Steph McGovern brings you up to speed on interest and how it's calculated.
When you borrow money from a bank or building society, they charge interest; money you pay back on top of what you borrowed. What it costs depends on the interest rate and how long you take to pay what you owe.
And if you save money with a bank or building society? They pay you interest on top of your savings.
So, whether you're borrowing or saving, it pays to know about interest.
Teacher notes
Choose from a selection of activities to help students learn more about borrowing, saving and interest.
Before watching
Questions to get the class thinking and talking鈥
- What is interest?
- When do you earn interest?
- When do you pay interest?
- What should you consider before saving or borrowing money?
Establish 'interest' is a charge made to borrow money or a payment you get when you save money.
Using the film
You may wish to play the film twice: once straight through and once with pauses, to take students' comments and questions.
When Steph discusses compound interest, you could pause at each step of the calculation. Ask students to take notes.
After watching
- Role-play - Students could take turns playing Steph McGovern (or her secret twin Stefan) and guide the class through the calculation of compound interest for a different APR from that used in the film. Encourage their classmates to ask Steph or Stefan questions about the steps in the calculation.
Ask, 'So what's the difference between simple interest and compound interest?' Establish that with compound interest, you pay 'interest on the interest that has built up since you started borrowing', or you get paid 'interest on the interest that has built up since you started saving'.
Activity ideas
- Compound challenge - Give students 5 minutes to learn by heart Steph McGovern's explanation of compound interest. They'll find the wording in the video transcript (from 'And that's down to something called compound interest,' to 'But it's difficult to calculate, isn't it?').
Hide the video transcript and challenge individual students to repeat Steph's script from memory. Their classmates can prompt them if they get stuck.
Make this challenge trickier by requiring each student to perform a task while reciting: hopping on one foot, balancing an object, bouncing a ball or keeping a balloon in the air.
This fun activity helps students rehearse the main lesson information.
Glossaries - Students could compile glossaries of financial terms used in the film clip, along with their own definitions. This encourages them to clarify their understanding of key vocabulary. Terms might include: 'interest', 'compound interest', 'interest rate', 'loan' and 'APR (Annual Percentage Rate)'.
Rate tables - Ask the students, individually or in pairs, to draw up a table showing the compound interest you would pay if your borrowed 拢1,000 at 12% over 5 years. You could give the class this outline table鈥
| [YEAR] | [AMOUNT] | [APR] | [INTEREST] | [TOTAL] |
|---|---|---|---|---|
| Y1 | 拢1,000 | 12% | ||
| Y2 | ||||
| Y3 | ||||
| Y4 | ||||
| Y5 |
Students could go on to calculate the simple interest generated on 拢1,000 at 12% over 5 years. Ask, 'What's the difference between the two kinds of interest?'
- Bar charts - Students could draw bar charts to illustrate their rate tables. They could represent each year of borrowing as a pair of columns. The first column could show the simple interest generated and the second record the compound interest.
Graphing clearly illustrates the cumulative impact of compound interest on the borrower.
- Shopping around - Whether you're a borrower or a saver, it pays to shop around and compare the offers banks and building societies make. Not all bank accounts pay interest and not all savings accounts offer compound interest.
Students could work in groups to check an online price comparison website. Can they find the best deal for someone who has 拢500 to save and the best deal for someone who needs to borrow 拢500?
- Borrowing plan - Ask, 'Before you borrow money, you should make a plan for how you'll pay it back. What would this plan look like?' The students might suggest listing their income and outgoings, to see what they can afford.
Supported learning and SEN
Students could (with any necessary support) use an online interest rate calculator to explore the interest gained on savings at different APRs.
Closing the lesson
Students could share their recommendations from the shopping around task. The class could take a vote on the best deal for a saver and for a borrower.
Draw the students' attention to the 'small print', the terms and conditions of the offers they recommended. Sometimes, hidden penalties in these agreements make them less attractive.
If you're saving or borrowing, you need to check the 'small print' when looking for a deal.
Follow-up task
Ask the students to pick up a leaflet about a savings account from their local bank or building society. They should carefully scan the 'small print', underlining or highlighting any penalties that might make this account less attractive.
This short film meets and extends curriculum requirements for financial literacy at:
- Key Stage 3 and Key Stage 4 in England (Citizenship and Personal, Social, Health and Economic Education)
- Wales (Mathematical Development and Personal and Social Education)
- Northern Ireland (Mathematics and Numeracy and Learning For Life and Work)
- Third and Fourth Level and the Senior Phase in Scotland (Mathematics and Numeracy, Social Studies and Learning, Life and Work).
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