The Interest Gap: Are Banks Taking Too Much From Savers

Put money in a savings account, and the bank may pay you a modest rate. Borrow money from that same bank, and you may pay a much higher one. The difference can feel unfair. It helps to know what that gap pays for, and what you can do when your bank offers a poor deal.

What The Gap Pays For:

Banks earn interest on loans and pay interest on deposits. The difference is part of their income, but it is not all profit. Banks pay employees, maintain accounts and payment systems, and set aside money for loans that may never be repaid. They also need funds available for customers who withdraw deposits.

Consider a simple example: a bank pays 2% on a savings account and charges 8% on a loan. The six-point gap does not mean the bank keeps six cents of profit for every dollar involved. Deposits and loans have different balances and terms, and the bank has costs to cover. Still, some of the income left after those costs can become profit.

Why Your Two Rates Differ:

A saver can usually withdraw money from a savings account. A borrower may take years to repay a loan, and repayment is not guaranteed. Loan rates reflect that risk, as well as the type of loan, its length, and the borrower’s credit history. A secured mortgage and an unsecured credit card balance therefore tend to have very different rates.

Banks also respond to competition. A bank with plenty of deposits may see little reason to raise its savings rate. Another bank may offer more to attract customers. That is why two accounts with similar features can pay different amounts.

Is It Legal Theft?

Charging more on loans than a bank pays on savings is generally a lawful part of banking. The gap alone is not theft. That does not mean every offer is fair or every bank practice is legal. Misleading terms and unlawful lending discrimination are separate issues. The useful question is whether you understand the terms and can get a better deal elsewhere.

How To Keep More Of Your Money:

For savings, compare annual percentage yield, or APY, which reflects a year of interest with compounding. Check monthly fees, minimum balances, withdrawal rules, and whether the bank is FDIC insured. A higher rate loses its appeal if fees eat up the earnings. FDIC deposit insurance information.

For a loan, compare APR, monthly payments, fees, and the total amount you will repay. APR includes the interest rate and certain additional loan costs, making it more useful than the advertised interest rate alone. Get quotes from several lenders for the same loan amount and term. Consumer Financial Protection Bureau’s APR explanation.

Make The Gap Work Less Against You:

You do not have to use one bank for both saving and borrowing. Review your savings rate from time to time, especially if it has stayed low while other banks offer more. Before taking a loan, improve your credit where possible and compare written offers. Understanding the interest gap will not erase it, but it can help you earn more on your money and pay less to borrow.