How does the savings account earn interest?

savings account

Earning a lot of rupees is always exciting for parents, as their kids are excited when they save their pocket money in their piggy bank. The excitement is the same as watching when your piggy bank is filled up. 

Interest rates on a bank account are also like that. People usually prefer a banking account that allows them to earn a good interest rate. A savings account is one of the best banking accounts that can earn good interest rates. 

Earning the interest rates on your savings account are good cushions that help you to reach your future savings goals. 

Why banks pay interest to customers

If you have wondered why banks pay interest to their customer, the answer behind this is simple as you think. When you open any banking account, you are making a partnership with your bank. 

Banks use your deposited money to lend to borrowers in the form of loans, credit cards, or mortgages; in return, you will be paid in the form of interest. 

How does interest earned in a savings account?

Based on your account, your bank either uses simple or compound interest to determine how much money you will earn interest. It is good to know the type of interest your account uses, but it may impact your annual percent yield (APY). 

Here the role of annualized rates comes that helps to determine the money in your account on which you earn interest. Here are the two types of savings account interest rates earned on your savings account. 

Simple interest

Simple interest is calculated with the help of the principal balance or the original sum of money deposited into your saving account. This type of interest is not increasing over time. For example, if you begin with $1000 in your account, your bank will base the interest on $1000. 

Compound interest

Compound interest calculates APY with the help of the principal balance and interest that you earn. Interest will be compounded daily, monthly, quarterly, or annually, based on your account. 

For example, if you begin with $1000 in your account and you earn 5% interest, then your bank account will be based on $1005. 

How does your savings account earn interest?

How much interest you earned, it depends upon the type of account you have. With most money market and savings accounts, you will earn interest every day, but interest is paid in the account monthly. 

Usually, the CD pays you at the end of a particular term, but there are wide options available to earn interest payments monthly or twice a year. Still, if you are unsure how interest works in your savings account, then consult with your bank. 



This article tells you about interest earned on your savings account. The simple logic behind this is that you can save your hard-earned money in your savings account. Your bank uses this money to lend money to a borrower. And in a result, they will pay you interest on the money deposited in your savings account. 


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