why is the interest rate on loans higher than the interest rate on savings accounts?

Answer 1

The difference between the interest rate on loans and the interest rate on deposit accounts is called the net interest spread. Banks and other financial institutions have to keep their loan interest rate higher than their deposit interest rate because if it's the other way around, they would be paying out more money than they're taking in. It's not that banks are "in it for the money"...every business has to make more than it spends...that's common sense. We charge you to use our money (loan); we pay you to let us use your money (deposit accts.). In terms of the annual report, deposit accounts are liabilities, and loans are assets. You'd think it would be the other way around, right?

Seriously...it's not that banks are greedy for money. We simply have to be able to stay open! And the fees that we charge...aren't just because we're all big meanies with nothing better to do than nickel and dime you to death...it's because the services we offer that we charge fees for really do cost us something. If we made our fees match what our actual expenditure is for any given action, they would be a lot higher than what you're experiencing currently.

A few decades ago, there was a financial crisis among the savings and loan institutions...they were paying higher interest rates on their deposits than what they were charging on their loans. They started to go bankrupt. The Fed had to step in and set up some guidelines. What made this situation even worse was that people weren't paying their loans...so the S&L's were stuck with all this collateral...houses, usually...that they couldn't sell. So here they are, broke, with all this junk they can't use. That's why we have to charge more for a loan than what we pay on a deposit account.

Answer 2

I would keep the minimal amount I could in my savings account. Keep just enough (liquid assets) to pay for monthy expenses and may be a 2 or 3 thousand for an emergency... such as if, the car has to go into the shop or like emergency. I'd put the rest of my savings into a CD (Certificate of Deposit). It gives you a higher interst rate but you wont be able to use that money for the term of the CD, which could be as little as 6 month or over a year. It depends on what you agree to do with your bank. Usually the longer the term the higher the return. CD interest rates very month to month... sometimes after the CD matures I'll put the money back into my saving until I can get a better rate on my next CD.

Good luck--managing your money

Answer 3

Interest paid to depositors is cost of funds so far as the bank is concerned and interest paid by the borrowers is the return on the funds. Naturally, the return has to be higher than the cost. The difference is known as"Spread:. The spread appears to be higher if you compare the cost of funds of Savings Deposits because the interest paid on such deposit is low. However the interest paid on Term Deposits and CDs is much higher.
So there is a concept of Average cost of funds. and also average return on deposits. Banks have to keep certain portion of their deposits in liquid or semi liquid form(CRR and SLR) where return if any, on such funds is very low. Again certain category advances are to be disbursed at very lower rates (zero percent, four percent etc). Considering these factors banks fix their Prime Lending Rate, which is a benchmark rate.

Of course, if you have deposit with the bank that is not yet matured but you require a part of the amount for short period, banks would be pleased to grant you loan against that deposit, about 1 to 2 p.c. above rate of interest applicable for the deposit. Still, this rate would be much lower than the PLR, Prime lending Rate!

Answer 4

Not much Probably under 2% if it is just a normal savings account. You would need to put it in an account that would tie the money up for a year or more to get a better interest rate. Even then, your rate is going to be really low.

Answer 5

Bank has to cover all the administrative expences plus Profit with it. The Main income of the Banks us from the Interest rates charged to different kind of loans.

Answer 6

Savings Bank: You deposit the amt and withdraw at anytime.
so there is no gurantee to use your money for lending purpose. so the Bankers use term deposits and borrowed money from RBI. They have to pay inerest to the deposit holders or to the RBI. In addition to that the Bankers have establishment charges to run the Bank. so in addition to the Bank rate,deposit rate the overheads are there. that is why the Advacne rate is higher than the SB & termdeposit

Answer 7

Because banks borrow money from you at a low rate and loan it to others at a higher rate.

Answer 8

Surely you jest. The bank is in it for profit. Your deposited funds are there for safe keeping. The fact that they pay you to hold your cash is just a bonus to you. The loan is where they make the vast majority of $$ to the bottom line.

Answer 9

banks entice people to save their money with them by offering a rate of return. the banks pool these savings and loan them to another individual at a higher rate. the bank pockets the difference.

Answer 10

well first ans my question " why do u sleep , earn, and wht the relationship with other humans ? u just make u r self understand
tht it's a bartersystem , every one wants something for there dids, at first u decide why u want to know abt the bank's privacy.
r u interested to start a new bank with ( non-financial motives) and to serve d nation out of som hidden money.