Online banks, which offer online checking and savings accounts, have become increasingly popular with many consumers. As the name suggests, these are bank accounts that you access and manage entirely online, which often makes the banking process easier. The bank has no physical branches and you cannot access your account in person. Due to their lower overhead, some may offer better interest rates than a traditional account, but otherwise have the same rules and products as in-person banking. If you have money to save or invest, consider working with a financial advisor who can help you create an asset allocation plan.
What is an online savings account?
An online savings account is a savings account that you access and manage entirely online. There are no physical banks that you can visit. Instead, you do all your transactions through the bank’s website and apps. You cannot do business in person, but online banks generally provide access to cash through an ATM in the same way as any other institution. Some traditional banks offer online banking services or options, which is different from banking with an online bank.
Many consumers also use traditional bank accounts as de facto online accounts. If your bank doesn’t have a branch near you, or if you never go there, you usually have all the tools you need to manage your account entirely online. A large and growing number of consumers prefer to bank this way, doing all their business through their bank’s online tools.
The popularity of this form of banking is what gave rise to online-only banking. As customers increasingly conducted all of their business through websites and apps, some entrepreneurs realized they could offer banking services without the costly footprint of retail. They created online banks and online savings accounts in response.
Advantages and disadvantages of online banking
Since online banks have lower costs than physical institutions, they generally offer lower fees and better interest rates, and the difference can be substantial. At the time of writing, the average savings account offered an interest rate of 0.13%, according to the FDIC monthly report. In contrast, many online savings accounts offer interest rates between 1.5% and 2.1%. If you have $100 on deposit, that’s the difference between getting $2 in interest or 13 cents.
The trade-off for using an online bank is access to services. You can’t seek customer service in person, which can be a significant issue for some customers. You could end up paying higher ATM fees if your bank doesn’t have the same network as a retail institution, although this is a risk with all smaller banks, not just online ones. Finally, you may not have access to the same range of products. For example, many online banks do not offer loan and mortgage services, money orders, or financial management.
Finally, handling cash can become more difficult. While most consumers can deposit checks relatively easily via their camera phone, depositing cash will require a trip to the ATM and can be a difficult process. If you work in high-profit industries, like services or retail, this can be a very real problem.
The extent of the problem depends entirely on your banking needs. Some consumers are looking for a solution that combines the best of both worlds by opening accounts with both a traditional bank and an online bank, transferring their money between the two. It’s not necessarily a bad choice, but be careful not to erode all of your earnings due to potentially high transfer fees between institutions when you transfer your money between checking and savings.
Are online banks legit?
There is nothing inherently suspicious about online banking or online savings accounts. However, it’s important to do your homework before trusting someone with your money. Because an online bank does not have a physical presence, it is easier for scammers to operate in this industry, so it is important to verify banks through the FDIC before opening an account.
You can check this through the FDIC’s BankFind service. Do not deposit funds with a bank that is not registered with BankFind. Even if it is only foreign institutions, the banks go bankrupt. If your bank goes bankrupt and is FDIC insured, you probably won’t even notice it. If not, you can easily lose everything on the deposit.
Online savings accounts are bank accounts that you manage and access entirely online. While some traditional banks offer online services such as an online savings account, most of the time they are offered by online-only banks, which have no physical location. These accounts can offer a higher APY, allowing you to get the most out of the money you save. However, if you manage a lot of money that needs to be deposited, this might not be the best option for you.
Don’t worry if you don’t know how much you should save or where to put your money. You can seek help from a financial advisor who can provide you with the information and tools needed to succeed. SmartAsset’s free tool connects you with up to three financial advisors who serve your area, and you can interview your matching advisors for free to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, start now.
Online savings accounts are, for the most part, a feature of online banks. These institutions may offer you better interest rates, but at the cost of certain features and products. Traditional banks also have their advantages and can actually offer more stability if you have more cash to put aside. Find out which one is right for you.
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What is an online savings account? appeared first on SmartAsset Blog.