Bank Accounts

Why Do Bank Accounts Have Interest on Them?


Banks usually pay their client’s interest on their accounts because they want to let their patrons know they are in partnership with them. They will take the money that their clients deposit and offer it to their other clients as loans. In return, the client receives interest. However, this interest appears to be small in the beginning. Still, if people allow interest to be added to their accounts over several years, they find that the interest adds a significant amount to the money they initially invested.

A savings account will earn interest in the following two ways:

Simple Interest

The bank bases interest on the amount of money with which people open their accounts. For example, if the initial balance was $1,000, the bank will calculate interest based on $1,000 throughout the life of the account.

Compound Interest

Money is compounded daily, monthly, quarterly or on an annual basis. For example, an account with $1,000 will earn $5 in interest. The next time the bank calculates an interest payment, it will base the payment on $1,005.

How Does Interest Work?

The bank is paying its clients interest so that they will keep their money deposited in their accounts. The best way to decide which account offers the best interest rate is to look at the annual percentage yield or APY.

The APY depends on the interest rate and how often the interest will be compounded. For example, the initial deposit is $5,000, and the client never takes out or deposits any money. The interest rate is 1.00%, and it doesn’t change. Instead, it compounds annually, so the interest is paid once a year and amounts to $50. The annual percentage rate is also 1.00% because it is only compounded once. For example, suppose a client has an account with a higher interest rate and a higher APY and maintains a habit of making regular deposits. In that case, the interest earned can increase significantly over a more extended period.

Why Does the Bank Charge Interest to Borrow Money?

When someone borrows money, the lender will charge interest. This means that the borrower will pay back the original amount borrowed plus the interest that the interest rate adds to the balance. Financial institutions can afford to pay their clients interest because the interest rates they offer their clients are lower than the interest payments they receive on the money they lend to borrowers.

According to the experts at SoFi, the place to find the best interest rates is in an online bank account. That’s because traditional banks have to pay so much money to run a financial institution at a brick-and-mortar business. Online banks can pass the savings on to their customers and offer higher interest rates. Generally, new clients do not have to pay any fees, and there aren’t any minimum balances to maintain.
People can find an interest bearing checking account at SoFi and other online leading financial platforms.

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