Why is the interest rate you pay so much more than the interest you earn?

Friday, April 1, 2022
Why is the interest rate you pay so much more than interest you earn?
There's a big difference between what online banks pay you for savings interest compared to brick-and-mortar banks.

SAN FRANCISCO (KGO) -- Why do you pay so much in interest, and yet your savings account gets so little? There seems to be a big disconnect between the interest rates you pay and the interest rates you get with a deposit account. Why is that? Today, 7 On Your Side's Michael Finney has an economics lesson for you.

Check a sampling of the going rates for a home mortgages posted by Bankrate.com, and even those with good credit would be offered rates pushing 5%.

Look at the rates banks are paying for "savings" and rates hover around a half to 1%. The best 7 On Your Side found was 1.15%. Many brick and mortar banks are paying even less.

That spread is not going unnoticed on Michael Finney's own Facebook page.

Wendy says: "Banks get you coming and going." Jerry ads: "Even if rates go up, it would be so minuscule."

So what is going on here?

7 On Your Side asked Greg McBride. He is Chief Financial Analyst for Bankrate.com. He says comparing savings and mortgage rates is like comparing apples and oranges.

"Savings rates are tied to the shorter-term interest rates and so they're much more dependent upon the Federal Reserve raising short-term interest rates. They've done so once by a grand total of a quarter of a percentage point," McBride says. "Mortgage rates, on the other hand, are tied to longer-term interest rates, such as long-term government bonds. Those yields are up substantially since the beginning of the year."

So what is a consumer to do? Shop around. Look for a low mortgage rate when buying a home or refinancing, and shop locally and online for the best rate for your savings account.

"Most banks are paying next to nothing and they're sitting on a mountain of deposits so they're unlikely to be quick to pass along higher rates," McBride says. "A lot of online banks, by contrast, pay savings rates that are much higher -- about 10 times higher than what the average bank pays -- and they'll be quicker to pass along those higher rates as interest rates go up."

7 On Your Side asked why online banks pay more and McBride they pay more to attract customers, while brick and mortar banks rely on their branches to bring in business.

Take a look at more stories and videos by Michael Finney and 7 On Your Side.

Have a question for Michael and the 7 On Your Side team? Fill out the form HERE!

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