Anonymous

26 May 2019

∙

How does banks' interest rate per annum on saving account work?

Let's say if it's 1% P.A, a simple case is when you $1000 in your bank account on January and once the year is completed you saving account would have increased by $10, but there is bound to have inflow (salary crediting) and outflow (Expenditure) monthly or even daily, how do the banks take into account for such.

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Yang Teng

26 May 2019

There's two types of interest: simple and compound (a little more complex).

The interest you have described is known as simple interest, known for it's negligible returns. Compound interest is different. What it does is that you will be given interest from your 'principal' then interest from your 'principal + interest' then interest from your 'interest + principal + interest' and so on...hence the term compounding.

For banks, interests given are interest compounded monthly. That's why you receive some interest every month (instead of yearly).

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