How Does Bank Interest Work?

You can define bank interest as receiving rent for your money.

When you deposit money into a bank account, the bank provides an interest rate, or a percentage of the deposit that grows monthly or annually. Borrowed funds also accumulate interest that you must pay to the bank.

Features

The interest rate is the percentage of the loan or deposit that grows over time. If you borrow money from the bank, you owe the bank the interest amount. If you deposit money in an account, the interest adds itself to your total.

Types

Simple interest is the most straightforward type of interest. To calculate your interest, multiply the original loan or deposit amount, called the principal, by the interest rate and the number of interest periods. Compound interest is when the interest itself accrues interest. In other words, the total amount after interest has been calculated is considered as the principal after each interest period.

Considerations

Pay attention to interest trends over the years to know when to invest your money or take out a loan. Different banks have different interest rates, so learn about competing rates before deciding where to bank.

References

• Reference for Business: Interest Rates
• WTAS: Interest Rate Considerations

Resources

• Simple Interest Formula: Interest Calculator