Understanding Banking Interest Rates: What You Need To Know

Finding the right bank with the best interest rates can help you grow your money without doing anything except putting funds in your account. In order to take advantage of high-interest saving financial services, first, you have to understand banking interest rates in general.

Here is what you need to know, from low-interest personal loans to high-interest savings options.

What Is Interest? The Basics

Let’s break this down slowly from the very beginning. What is interest? Interest is the cost of borrowing something. You’re either earning interest as the lender or paying interest as the borrower. By depositing cash into your bank, you become the lender, so they pay you interest for borrowing your money.

Although as a child you may have thought your money is safely stowed in an untouched vault, your money is actually being used by the bank to give out loans for other bank users. These users, in turn, pay interest on their loans, which is used to pay your money back. The interest rate you’ll earn from your bank is written out as an APY, or an annual percentage yield.

High-Interest Saving

The bank will determine your APY, although it is affected by the general health of the economy. This can also change as the bank goes through changes, for example, if they’re trying to attract new deposits. Rates can vary significantly depending on which bank you use, from 0.01% APY to 1% APY. This would make a huge difference.

Let’s say you have $5,000 in your account. This would mean you would receive 50 cents in interest with 0.01%, to over $50 in interest with 1% over the span of a year. This interest is calculated by taking the banks APY, divide it by the amount of time you have kept money in your account, and multiply that number by the amount of funds in your account. This will give you the amount added to your account through interest, finding the compounding interest.

Low-Interest Personal Loans

While you’re going to want to choose a bank with high-interest savings loans to get the most for your money, when taking out a loan from a bank you will want the lowest possible interest so that paying it back will be as easy as possible. If you have a lower credit score, then getting a mortgage with a great interest rate might be difficult. Landlords take your credit school as an indicator of how trusted you can be to pay your rent on time, and it is a reflection of how you’ve paid off your other loans.

According to Federal Reserve data from February 2018, the average annual percentage rate for a two-year personal loan was 10.22%. On the other hand, some personal loan companies can demand as high as 36%, taking significantly more money to pay back. Generally speaking, the higher your FICO FICO credit score, the easier it will be to get a loan for less money.

Unless you use MoneyLion! This application does not discriminate against those users with low credit scores and gives every user access to a low-interest 5.99% APR loan to keep their savings progress on track.

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