Eli5 why do banks give interest on money that I am keeping there?

Question

It just seems like a semi necessary thing to have to use a bank, why do they pay me a % to keep money there?

In: 1333

Answer 1

Let’s say you have $1000 in your pocket. You can purchase anything up to $1000 without issue. But, once you loan it to someone else, including a bank, you can no longer use it to purchase goods. The interest is to pay for the inconvenience of no longer being able to use your own money. It is sometimes called a convenience fee. Historically, the real interest rate has been between 2 and 3 percent. Other factors that go into an interest rate are inflation, long term risk, and the risk that you won’t be repaid.