What happens to money after you deposit it? - II

But, there is another side to interest. When someone borrows money from a bank, the bank charges interest, and it charges borrowers a higher rate than it pays savers. For example, it might pay savers 3 percent and charge borrowers 8 percent. The difference, 8 percent minus 3 percent, goes to the bank. Charging interest on loans is one of the main ways for a bank to make money. The rate of interest a bank charges depends largely on two things:
• how many people want to borrow money, and
• how much money banks have available to lend. If a bank has plenty of money to lend, and the demand to borrow money is not particularly strong, interest rates will tend to be low in order to attract borrowers.
But when banks have a smaller amount of money to lend, and the demand to borrow is fairly strong, interest rates will rise. As a depositor, you want interest rates to be high, but as a borrower, you want them to be low. When it comes to paying interest on savings deposits, there usually isn’t a big difference between banks. They pay just enough to stay competitive with one another and attract depositors.
 So, if one bank is offering a much better (higher) rate than most other banks, try to find out why. And remember the old saying: If something sounds too good to be true, it probably is.