Finance Guide

The term “interest rate” is used when discussing credit cards, car and home loans, and other forms of borrowing of money. Represented as a percentage, it refers to the fee the bank, credit card company, or other institution charges to lend money. For example, if you buy an MP3 player for $100 with a credit card, the credit card company pays the bill-in other words, it lends you $100-and charges you interest, or a fee, for that loan.

This fee, known as the interest rate, is a percentage of the amount borrowed. In the example of the MP3 player, the credit card company might charge an interest rate of 15 percent per year. If you paid the bill immediately, you would owe no interest. If you waited a year to pay the bill, you would be charged 15 percent of the $100 loan, or $15, raising the total amount owed to $115.

Charging interest is how banks and other lending institutions make money, and without it they would have no incentive to make loans. Lending money, in turn, is essential for the economy. It allows people to make necessary large purchases, such as cars and homes; to pay for college tuition; and to afford vacations and other desired nonessential purchases. Companies borrow money for a variety of reasons, such as buying manufacturing equipment, that help them start up, grow, and compete with other businesses. Even governments take out loans when they spend more money than they raise with taxes.

Consumers, businesses, and governments all pay an interest rate on their loans. Their desire or even ability to take out a loan will often be determined by the size of the interest rate. If an interest rate is low, such as 5 percent, a loan is much cheaper and much more desirable than if it were 20 percent. For example, when buying a house with a 30-year loan, a person might spend hundreds of thousands of dollars more on interest (over the 30-year period) if the rate were 20 percent as opposed to 5 percent.

Modern economies are greatly influenced by changes in interest rates. Generally speaking, when interest rates fall, three things happen: more loans are made, money from the loans (otherwise not available to people, businesses, and governments) is spent, and thus the economy grows more quickly. When interest rates rise, the reverse happens, and economic growth slows down.

Savings accounts are an important part of banking… most people have at least one, and they are a recommended first step in working on a retirement plan or savings and investment strategy.

There are many people who aren’t even sure how their savings account really works, they simply deposit money into the account and interest is paid monthly.

While this is essentially true, there are several factors that can influence the amount of interest that an individual pays… and the difference in accounts from one bank to another can sometimes be quite large.

Below you’ll find some basic information about different features of savings accounts, as well as how to find the best deals in savings that you can get.

Purpose

Obviously, the main purpose of a savings account is to put money aside for later, all the while drawing interest on your deposit. Different accounts may have different features, however, and can be used in different ways depending upon those features.

Some savings accounts are used as security for certain credit and debit cards, and others are used as a buffer to prevent overdrawn cheques. It is important to inquire about the various types of savings accounts available at your bank so that you can find the account that best suits your needs.

Interest

Interest on a savings account is the additional amount that is paid to your account based upon the balance that you keep. The interest rate is paid as a percentage of the total balance, and is based upon rates that are set nationally. The rate that is paid may differ from one bank to another, especially depending upon the local economy and the policies of the bank in question.

Withdrawals

One of the features that are common to most savings accounts is that the number of withdrawals allowed each month is quite limited. In most locales banks only allow you to make 3 to 6 withdrawals within a month’s time before small fines are added onto the transaction fee.

In many cases, these fines are mandated by federal law in an effort to prevent abuse of the higher interest offered by savings accounts and to encourage bank patrons to carry a balance in their savings until later in life.

These fines are often quite low, however, so should you need to make one more withdrawal in a month’s time you won’t severely reduce your balance from the fines.

Account Features

As mentioned above, there are a variety of uses for savings accounts… because of this, different accounts have different features that can be used to make some of the uses easier. They may have a minimum deposit for opening the account, for instance, or the account could be linked to a chequeing account. Make sure you know the features of the savings account that you’re considering before making your final decision.

Finding the Best Deal

In order to find the best deal on a savings account, it’s important to shop around and find the bank that has the best offer on interest rates and features.

Request interest rate quotes and information about the different types of accounts that are offered at several banks in your area… by comparing these quotes and the information on the available accounts, you can make a decision on which savings account would offer you the best return on your money.