You keep money in the bank.
After some time, the amount increases.
You borrow money from the bank.
After some time, you have to pay more.
This article explains how bank interest is calculated — simply and clearly.
What Is Bank Interest?
Interest is the price of money over time.
When you save money, the bank pays you interest. When you borrow money, you pay interest to the bank.
Interest Works in Two Directions
- Savings interest: Bank pays you
- Loan interest: You pay the bank
The calculation logic remains similar — only the direction changes.
Simple Interest Explained
Simple interest is calculated only on the original amount.
Example
₹10,000 at 5% per year
→ Interest = ₹500 per year
→ Same every year
Most savings accounts do NOT use pure simple interest.
Compound Interest (Most Important)
Interest on interest.
Banks calculate interest on:
- Original money
- Previously added interest
Why compound interest matters
It grows savings faster and increases loan cost quickly.
Daily Balance Method
Most banks calculate interest daily.
Interest is calculated on your daily closing balance.
That's why timing of deposits and withdrawals matters.
Credit Card Interest Is Different
Credit card interest is much higher and calculated daily.
This connects directly to:
👉 Debit Card vs Credit Card Explained
Missing full payment triggers heavy interest.
Does Interest Apply During Pending Transactions?
When money is stuck or pending, interest depends on settlement status.
Why Banks Use Interest
- Encourage saving
- Control borrowing
- Manage risk
- Earn profit
Interest keeps the banking system balanced.
Simple Summary
Interest = time value of money
Money grows or costs more.
Compound matters
Interest on interest.
Daily calculation
Balance timing is important.
Credit cards are expensive
Highest interest rates.