Why Online Savings Account have Better Interest Rates
A savings account is a useful investment option that everybody should have. Unfortunately with interest rates where they currently are if you open an account with your local bank you will get a very low rate of return. You can get a much better rate at an online bank. This raises the question of why can online banks offer better interest rates than regular banks? There is actually no great mystery here you just have to think about the way that banks do business.
The main reason that online savings accounts have a better interest rate is that they have less overhead than a regular bank has. Banks make their money on the difference between what they pay to people who deposit money and the interest they charge on the money that they loan. Since the cost of running an online bank is so much less than a regular bank they can afford to pay higher interest rates. Not having to maintain physical branches allows them to save a great deal of money which they are able to pass on to the consumer.
The other main reason that online savings accounts offer a higher interest rate is that they have to in order to attract customers. It is unlikely that many people would transfer their savings to an online bank if they paid the same interest as a regular bank. In order to customers they need to offer them an incentive and the one that they offer is a high yield online savings account that has a better interest rate than you could get at your local bank. This has proved to be a successful way to get customers.
There are some downsides to online savings accounts and these actually contribute to why they are able to offer higher interest rates. The biggest of these is that it is not as easy to access your money as it would be with a regular savings account. In part the banks need to pay you a higher interest rate in order to make up for the inconvenience that this causes, again people are not going to agree to this unless they are getting something out of it.
The difficulty in getting your money out of an online savings account also explains another reason that they can offer higher interest rates. People usually don't take their money out of an online savings account as often and if they do it will take time. In general the longer it takes to get your money out of an investment the better interest it will pay. In this case it is because the bank can loan out more of the money because it doesn't need to have as much cash on hand to pay for withdrawals. That means that the bank can get a better return on the money which means that they can offer a higher interest rate.