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

Because banks don’t just hold your money *for free,* they are businesses that seek to earn money for their existence. They take your money and they lend it to other people through mortgages and loans and they earn interest on that money and that’s their profit.

Now the there laws in place that say things like for every $1 a bank lends in a mortgage it needs to keep $2 in “the vault”, in other worlds there is a limit on how many loans a bank can make, which limits how money it can earn, which is all based on how much money it holds in it’s “vault” (banks don’t really keep much physical money any more the vault is more like a spread sheet at this point).

So the interest rates banks offer are the way of attracting you and your money to deposit there so they can take your deposit and give it to someone else for profit.

In general the more money that’s deposited the less the banks need to attract new people which is why, for example, in the summer of 2020 banks weren’t super eager to offer high interest rates to get people’s money – pretty much every was stuck at home saving their pay checks and savings account balances went sky high for a little bit.