F. Financial Literacy · Money and Finances: Ways to Pay, Financial Goals, Interest Rates and Sharing Resources

Interest Rates and Fees: Accounts and Loans

F1.4 A1About 50 minutes

Learning goals

I can explain what an interest rate is, and that you earn interest on savings and pay interest on loans.
I can calculate one year of interest using friendly percents.
I can identify types of interest rates (savings, loan, credit card, fixed, variable) and fees for accounts and loans.
I can compare accounts or loans from different financial institutions by looking at both interest and fees.

Words to know

interest rate
The amount of interest for each $100, as a percent, usually for one year. 3% a year means $3 for every $100 for one year.

financial institution
A business or organization that keeps money safe, lends money and offers accounts, like a bank or a credit union.

credit union
A financial institution owned by its members (the people who bank there). In many French-speaking communities it is called a caisse populaire.

chequing account
An everyday bank account for spending, with a debit card. It usually pays little or no interest.

savings account
A bank account for saving that pays interest.

GIC
Guaranteed Investment Certificate. You agree to leave your money in for a set time, and usually get a higher interest rate.

loan
Money borrowed that must be paid back, with interest.

fixed rate / variable rate
A fixed rate stays the same for an agreed time. A variable rate can go up or down.

overdraft
When an account is allowed to go below $0. The bank charges a fee and/or interest.

Remember from Grade 5

In Grade 5 you learned that interest is the extra money paid for borrowing. You worked with amounts like "borrow $60, pay back $65." You also learned that % means out of 100.

In Grade 6 you'll learn about interest rates: interest written as a percent. You'll see that interest can work for you (when you save) or against you (when you borrow), and you'll find out about the fees that banks and other financial institutions charge.

Why do banks pay you?

Juniper puts $200 of birthday and dog-walking money into a savings account. A year later, the account has $204. She didn't add anything. Where did the extra $4 come from?

It's interest. When you keep money in a savings account, the financial institution can lend some of that money to other people. It pays you interest for letting it use your money. Then it charges more interest to the people who borrow. The difference (plus fees) is one way banks earn money.

What is an interest rate?

An interest rate tells how much interest there is for every $100, usually for one year.

2% a year means $2 for every $100 for one year.
To find 1% of an amount, divide by 100. 1% of $200 = $2.
Then multiply: 2% of $200 = 2 × $2 = $4. That's Juniper's interest!

The same idea works for borrowing. If you borrow $200 at 10% a year, then 1% is $2 and 10% is $20. You pay back the $200 plus $20.

All the rates in this lesson are example rates. Real interest rates change over time and are different at each institution.

When you save, interest is added for you. When you borrow, you pay interest.

Types of interest rates

Savings rates: what you earn in a savings account or a GIC. Usually low; a GIC often pays more because you promise to leave the money in for a set time.
Loan rates: what you pay to borrow for a car, a home (a mortgage), school (a student loan) or something else.
Credit card rates: what you pay on a credit card balance that isn't paid in full. These are usually much higher than loan rates, often about 20% a year.
Fixed rates stay the same for an agreed time. You know exactly what you'll pay.
Variable rates can go up or down as rates in the economy change.
Introductory (promotional) rates are special rates for a short time, then they change. Read the fine print!

Who offers accounts and loans?

Banks, credit unions (called caisses populaires in many francophone communities), and online-only banks. Each one sets its own rates and fees, so it pays to compare.

Fee	What it's for
Monthly account fee	Charged every month just to have some accounts. Many student or youth accounts have none.
Transaction fee	Charged for each purchase, withdrawal or payment above a set number.
ATM fee	Charged for using another institution's ATM.
E-transfer fee	Some accounts charge for each e-transfer sent.
Overdraft fee or interest	Charged when you spend more than is in the account and it goes below $0.
NSF fee	"Not sufficient funds": charged when a payment or cheque bounces because there isn't enough money.
Annual card fee	Some credit cards charge a fee every year.
Late payment fee	Charged when a bill or loan payment is late.

Common fees for accounts and loans. Amounts are different at each institution.

Worked example

Example 1: Earning interest

Ahmed puts $500 in a savings account that pays 3% a year (an example rate). How much interest will he earn in one year? How much will he have?

1% of $500: $500 ÷ 100 = $5.
3% of $500: 3 × $5 = $15.
Total after one year: $500 + $15 = $515.

He earns $15 in interest and will have $515.

Worked example

Example 2: Paying interest

A family borrows $1000 for one year at 7% a year (an example rate) to replace a broken furnace. They'll pay it all back at the end of the year. How much will they pay back?

1% of $1000: $1000 ÷ 100 = $10.
7% of $1000: 7 × $10 = $70.
Pay back: $1000 + $70 = $1070.

They pay back $1070: the $1000 they borrowed plus $70 interest. (Real loans are usually paid back a little each month, so the interest works out a bit differently, but the idea is the same.)

Worked example

Example 3: Fees can matter more than interest

Rina has $400 to save for one year. Which account is better? (Example accounts.)

Account A: no monthly fee, pays 0.5% a year.
Account B: $4 monthly fee, pays 2% a year.

Account A interest: 1% of $400 = $4, so 0.5% = half of $4 = $2. Fees: $0. After a year: $402.
Account B interest: 2% of $400 = 2 × $4 = $8. Fees: 12 × $4 = $48.
Account B after a year: $400 + $8 − $48 = $360.
Account B has the higher rate, but the fees are much bigger than the interest.

Account A is better: Rina ends with $402 instead of $360. Always compare interest and fees together.

Account B pays more interest (+$8), but $4 a month in fees takes away $48. Rina ends the year with $402 in Account A and only $360 in Account B.

Worked example

Example 4: Fixed or variable?

A grown-up borrows $2000 for one year. A fixed rate is 6%. A variable rate starts at 5%, but it could rise to 8%. Compare the interest.

Fixed 6%: 1% of $2000 = $20, so 6% = $120. This won't change.
Variable at 5%: 5 × $20 = $100, if the rate stays at 5%.
Variable at 8%: 8 × $20 = $160, if the rate rises to 8% for the whole year.
The variable rate could save $20, or cost $40 more.

Fixed: $120 for sure. Variable: between $100 and $160, depending on what happens. Someone who wants to know their costs exactly may choose fixed; someone willing to take a chance may choose variable.

Interest works for you, or against you

Saving: interest is added to your money. Higher savings rates are better for you.
Borrowing: interest is added to what you owe. Lower loan rates are better for you.
A higher rate is good when you save and bad when you borrow!

Percent shortcuts

1%: divide by 100. 10%: divide by 10.
0.5% is half of 1%. 20% is 2 × 10%.
Estimate first. 3% of $500 should be a small amount, not $150. Ask, "Does my answer make sense?"

Just for fun

What's a bank's favourite kind of story?

One with lots of interest!

Hands-on activity

Compare two institutions

You need: paper, a pencil, a calculator and, with a grown-up, two financial institution websites or brochures (for example, one bank and one credit union).

Draw a table with two columns, one for each institution.
For each, find a youth or student account (or any savings account). Record: the interest rate, any monthly fee, and one other fee you find (ATM, transaction, e-transfer...).
Imagine you save $100 for one year. Calculate the interest and subtract a year of monthly fees for each.
Decide which account you'd choose and write two sentences explaining why.

What to look for: correct interest and fee calculations, and a reason that mentions both interest and fees.

Grown-up note: browse public pages only. Don't enter any personal information or open an account. Rates change often, so the numbers will be different from this lesson.

Your turn

What is 1% of $300? What is 3% of $300?

Leah saves $500 at 2% a year. How much interest does she earn in one year? How much will she have?

Max borrows $200 at 10% a year and pays it all back after one year. How much does he pay back?

Which kind of account usually locks your money in for a set time in exchange for a higher rate?

Name two fees that a bank account might charge.

What is the difference between a fixed rate and a variable rate?

Is a high interest rate good or bad when you borrow?

More practice: warm-up

What is 1% of $100?

What is 10% of $50?

Do you earn or pay interest on a savings account?

What do we call a financial institution owned by its members?

What fee might you pay for using another bank's ATM?

More practice: on your own

Sami saves $800 at 1.5% a year. How much interest does he earn in a year?

Two loans of $2000 for one year. Bank A: 6%, no fees. Credit union B: 5% plus a $50 set-up fee. Which costs less? By how much? (Example rates.)

Taylor has $40 in her account and buys a $55 item with her debit card. Her account allows overdraft, with a $5 overdraft fee (example fee). How much does she owe the bank now?

Why does a bank usually charge more interest on loans than it pays on savings?

A credit card's rate is about 20% a year (example). About how much interest would $450 owed for a whole year cost?

Challenge

Rhys puts $1000 in a GIC at 5% a year for 2 years. At the end of each year the interest is added to his money, and the next year's interest is figured on the new total. How much will he have after 2 years? How does that compare to getting 5% of $1000 each year?

Account X charges $3.95 a month for unlimited purchases. Account Y has no monthly fee but charges $0.75 for each debit purchase. How many purchases a month make Account X the cheaper choice? (Example fees.)

Mei has $600 to save for a year. Account A: 0% interest, no fee. Account B: 2.5% a year with a $1 monthly fee. Which leaves her with more money, and how much more? (Example accounts.)

Check your understanding

Quiz

An interest rate of 4% a year means:

What is the interest on $300 saved for one year at 2%?

Which usually has the highest interest rate?

A variable interest rate:

You borrow $500 at 10% a year and pay it all back after one year. How much do you pay back?

An NSF fee is charged when:

Account A pays 1% and has no fee. Account B pays 2% but has a $5 monthly fee. For $200 saved for a year, which ends with more?

For parents and teachers

What your child is learning: Ontario's Grade 6 expectation F1.4 asks students to explain the concept of interest rates, and identify types of interest rates and fees associated with different accounts and loans offered by various banks and other financial institutions. Students compute one year of simple interest with friendly percents (1%, 10%, halves and multiples), name types of rates (savings, loan, credit card; fixed, variable, introductory) and fees, and compare options by looking at interest and fees together. Compound interest appears only as a challenge; students calculate it in later grades.

Common difficulties:

Thinking a higher rate is always better. It's better for saving, worse for borrowing.
Ignoring fees. A small monthly fee can wipe out the interest on a small balance.
Percent slips: 3% of $500 is $15, not $150. Encourage estimating first.

Good to know: all rates and fees here are examples and real ones change often. Real loans and credit cards calculate interest more often than once a year, so the yearly figures are simplified.

How to help: If your child has a youth account, look at it together: is there interest? Any fees? Browsing two institutions' public web pages (without entering information) makes the comparison activity real.