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Why do banks pay the interest on the savings account?


Earning the huge dollars while will helping the parents to rake the lawn and take out the trash was always exciting as a kid. It did not matter that it was not huge of money. You seem to be excited to watch your piggy banks always fill up. 

The interest paid by the bank is also like that. The interest paid by the banks on your savings account helps you to reach your future savings goals. 

In this article, we tell you why the bank pays the interest on the deposited money in the savings account. 

Why do banks pay interest to their customers? 

If you are wondering why the banks pay the interest to the savings account holder, the answer is simpler than you think. When you go for the online savings account opening, you create partnerships with your bank.  

The banks lend the money to the borrowers in the form of loans, credit cards, or mortgages, and in return, they will be paid the interest to you. 

Type of the interest on the savings account

Based on the type of the account, your bank uses simple or compound interest to determine how much money you will earn at the savings account interest rate. It can be good to know which kind of interest your account use because it may have an impact on the annual percentage yield. 

This APY ( annual percentage yield) rate shows you how much money you can earn from the interest on your account over time. 

  • Simple interest 

Simple interest rates are calculated with the help of the principal balance, the original sum of money that is deposited into your account. This kind of interest does not account for any interest that you are earned over time. 

  • Compound interest 

Compound interest calculates the APY with the help of the principal balance, along with the interest that you can earn. The interest could be compounded daily, monthly, quarterly, or yearly based on the amount. 

How does the savings account earn interest?

It is based on your account. With most savings accounts, you will earn good interest every day, but the interest is typically paid to the account monthly. 

However, the compound interest will pay you at the end of the particular terms, but there are many other options to get interest payments every month or two times in the years. If you are still unsure how the interest works on the savings account, then it is suggested to call the bank and get all the information. 

Conclusion

This article is written on the interest that is earned by savings account holders. Whether you have small savings or big savings, there is the need to have a savings account in terms of the interest earned, along with the safety. 

It is suggested to go online to open a savings account and get access to all the benefits that come with the savings account. 

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