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Interest income is a financial term you need to understand. Bankrate explains.
What is interest income?
Earnings generated by investments such as savings accounts and certificates of deposit are referred to as interest income. For financial companies, revenue minus expenses is referred to as net interest income.
For private individuals, interest income describes the returns generated from interest-yielding accounts. Interest income is generated by savings accounts, CDs, and other investments that pay some form of interest.
Net interest income is a basic measure of earnings among financial companies, especially banks. Net interest income is the difference between the revenue generated by assets — loans, mortgages, and securities — and the interest costs on liabilities, such deposits in checking and savings accounts, and CDs.
Consumer banks generate the bulk of their interest income from mortgage loans, personal loans, and auto loans. When you make a recurring loan payment on your mortgage, the portion of each payment covering interest comprises the bank’s interest income on the loan. Investment banks and other financial institutions generate interest income from securities and a variety of investments.
Banks typically front-load interest at the beginning of recurring loan payments to manage risk and secure profits. As customers pay down their loans, interest income declines over the life of the loans.
Curious about how your mortgage payments can be deducted from your taxes? Calculate your mortgage tax deduction today.
Interest income example
During recessions, the economy curdles and employment suffers. People lose their jobs, and many miss payments on their personal loans and mortgages, impacting the interest income of the banking industry. The Federal Reserve typically lowers interest rates during recessions to make funds less expensive and boost economic activity. That means banks charge lower interest rates on loans, earning them less interest income, and savers receive less interest income from their deposits.
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