How Do Savings Accounts Work? | Santander Bank - Santander
How do Savings Accounts Work?
Whether you’re considering opening a bank account for the first time or you’ve been a customer for years, it’s common to wonder how savings accounts work. You probably know the basics: you deposit money into a savings account, and after a certain amount of time, you receive interest. But why do you earn interest on a savings account?
When you deposit money into a savings account, it isn’t just tucked away into a safe. Banks use these deposits for a variety of things—primarily to loan out money to borrowers. They charge the borrower interest on those loans, and give part of that amount back to you, the depositor, in the form of interest earned on your savings account. During this time, however, you still have access to your funds when you need them. Because many banks are members of the FDIC (Federal Deposit Insurance Corporation) your deposited funds are insured up to $250,000 per category, per depositor.*
How Do You Earn Interest on a Savings Account?
Now that you know why you earn interest, let’s talk about how and when you earn interest on a savings account. Each savings account has an Annual Percentage Yield, which is the estimated annual rate of return, including compound interest. This percentage varies depending on what savings account you have, and may also be influenced by factors such as your average daily balance, what other accounts you have with the bank, and where you live. Your rate can also change at the bank’s discretion.
Interest is calculated on your account each day, and if you have a savings account with Santander Bank, credited to your account each month. At the end of each day, 1/365th of your interest rate, which is called your daily periodic rate, is calculated based on your account balance. At the end of the month, the interest that has accrued during that time period is added to your account. This amount will be reflected in your monthly account statement.
How Does Compound Interest Work?
Each month, you also begin to earn compound interest on your savings account. Unless your rate changes during the year, your daily periodic rate will remain the same. However, because your accrued interest is added to your account each month, you begin earning compound interest. Compound interest is when you are earning interest on top of the interest you have already earned.
Interested in how much compound interest you could be earning? Use our calculator to help you calculate compound interest on a savings account over time.
Interested in Opening a Savings Account?
Santander Bank offers several different savings accounts, with a variety of interest rates and benefits.
Compare savings accounts to determine which is the best fit for you.
*There is a maximum of $250,000 of deposit insurance from the FDIC for each category of account ownership. Please visit fdic.gov for details.