How Online Savings Accounts Work

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Make money on money that's just sitting around -- that's the basic premise of a savings account. You put money in a bank. The bank lends your money out to other people and businesses in the form of personal and business loans, charging the borrowers interest on what they owe until they pay back the money. Meanwhile, the bank pays you interest for the privilege of lending your money.

­The all-powerful Internet has vastly changed the world of banking, but not its underlying premise. Online banking still operates on the principles of lending, saving and earning. But the advent of online-only banks -- banks that exist solely on the Internet and don't have brick-and-mortar branches -- has created great competition for traditional banks. Online-only banks may offer higher interest rates on savings and investment accounts. But although they make banking very convenient and versatile, online-only banks face their own problems and challenges.

In this article, we'll examine one piece of the world of online banking, the online savings account. First off, let's see how an online savings account compares to a traditional savings account.