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.*