Interest simply explained

Are you old enough to remember the time when banks paid great interest on deposits? Or do you remember the 2008 crisis in the financial markets, after which interest rates plummeted? They dropped so low that negative interest rates were introduced in Switzerland in 2015. Recently, in September 2022, the key interest rate was eventually raised again by the Swiss National Bank, and the negative interest rates came to an end. Ever since, everyone has been talking about interest rates again. But how does interest work? Who pays it? Who receives it? In this blog article, we will take a closer look at these as well as other questions and explain how you can profit from the current interest rate environment. 

What is interest?

Simply put, interest is the price you pay for borrowing money. When you borrow money, you pay interest in exchange for the fact that the lending party cannot access that money for a certain period of time. For example, if you take out a loan, you pay interest on that loan and later have to pay back more than you originally borrowed. Such interest is called nominal or debit interest. If, on the other hand, you lend money to someone – for example, to your bank by having money in your (savings) account – you receive interest from your bank in return. This interest is called credit interest. 

But banks don't just leave the money on savings accounts lying around; instead, they lend the money to other private individuals or companies in the form of loans. For these loans, the banks charge higher interest rates than what they pay you for the money in your savings account – and they keep the difference for themselves. This brokering of money between savers and borrowers is also known as interest margin business and is a vital part of banks' core business. Finally, just as you receive interest from your bank for your savings deposit, the banks also receive interest from the central banks when they deposit money with them. This interest is based on the key interest rate.

What is the key interest rate?

The key interest rate is an interest rate set by the respective central banks – in Switzerland, it is set by the Swiss National Bank (SNB). The key interest rate is one of the SNB's most important instruments, because it determines the interest rate at which commercial banks such as UBS can borrow or deposit money from/with the SNB. 

By raising or lowering the key interest rate, the SNB controls the demand for money and can thus influence the economic environment, the exchange rate of the Swiss franc, as well as the level of inflation. 

When the key interest rate is low, it leads to low rates on loans granted by banks to private individuals and companies. If, on the other hand, the key interest rate is raised, as has been the case in recent months, banks have to pay more to borrow money from the SNB. The banks pass on these rising costs by raising their interest rates on the loans they offer to their customers. In turn, consumers who are putting money aside, for example on savings accounts, benefit from rising key interest rates because they receive more interest on their deposits.

How can I earn money with my money? 

For a few months now, savers have been receiving interest again. At neon, for instance, you get interest on the money you have in your Spaces. This is a very simple and safe way to earn interest. neon Spaces work similar to savings accounts in traditional banks, but are very easy to set up and use (more on this below). 

If you want to deposit your money in a savings account, the compound interest effect will be particularly beneficial for you in the long run. Compound interest means that for every Swiss Franc you receive as interest, you will receive interest again in the future. The compound interest effect therefore offers exponential growth potential. 

Let's look at an example: Suppose you have 5'000 CHF in your savings account with an interest rate of 2.5% per year. If you have your interest paid out every year, after 50 years you will have put aside a total amount of 11'250 CHF, of which 6'250 CHF is interest – which is more than half of your gain (50 years x 5000 CHF x 2.5%). However, if you pay the earned interest back into your savings account every year to benefit from the compound interest effect, you will have a total amount of no less than 17'185.55 CHF after 50 years. This corresponds to an interest gain of 12'185.55 CHF, which is almost twice as much as without compound interest.

The more risk you take with your money, the higher the possible returns. So, if your risk tolerance is a bit higher, you can also invest your money in stocks or ETFs with neon. By putting money into the stock markets, you have higher potential returns than with savings accounts – while of course also having a greater risk of loss. Click here or here to learn more about neon invest. 

What else do I need to consider?

While the scenario described in the section above sounds tempting, it does not take into account potential costs, such as management fees for a savings account. In addition, there are often offers where a particularly attractive interest rate on a savings account is only valid for the first year, for example, or only for new money. Or it may be that an interest rate only applies if, apart from the savings account, you have other products at the same bank that may in turn be subject to a fee, such as a private account. Last but not least, there are also interest rate limits or disadvantageous withdrawal limits on certain savings accounts. Finally, foreign providers often offer high interest rates but are not covered by the Swiss deposit guarantee. 

That's why it's worth taking a close look at the conditions before deciding on a savings account. We highly recommend the comparison calculator at moneyland.ch to compare savings accounts.

What do I get with neon?

At neon, we're all about making your daily finances easier and, most importantly, cheaper. That's why we offer you the possibility to easily save money and earn interest at the same time with neon Spaces: On balances up to 25'000 CHF you currently receive 0.50% interest and on balances over 25'000 CHF it's currently 0.25%. Those interest rates apply to the total balance of all your Spaces and the interest is paid out at the end of the year.

Furthermore, we do not lock your money away in a secret vault, but give you access to your money at any time with a generous monthly withdrawal limit of 50'000 CHF. If you exceed this limit, a 2% fee will be charged on the amount exceeding the limit. So, if you ever need more than 50'000 CHF from your Spaces, you can simply withdraw part of the amount at the end of one month and the other part at the beginning of the next month. This way you can theoretically withdraw 100'000 CHF from your Spaces in two days without paying the 2% fee.

You can have multiple "savings accounts" for free in your neon app at the same time by creating different Spaces. Like this, you can save for different projects at the same time. And to make sure you don't lose track, you can assign a target amount for each Space. To make it even easier for you to reach those targets, you can also set up recurring payments to your Spaces on a monthly, quarterly, or yearly basis. By doing so, your Spaces will fill up (almost) on their own. 

And since everything is in your neon app, all you have to do is open a Space with a few simple clicks. There are no additional contracts to sign, no fine print to read, and most importantly, no hidden fees to pay. You always have your day-to-day and savings accounts in the palm of your hand. And if you do need a little extra cash in your main account, you can just move some money over from one of your Spaces and it's available to be spent with your card in 15 minutes.

You can find out how the interest rates at neon have developed in 2023 in our FAQ.