What Is the Cost of Funds?

By Kristi Waterworth – Updated Jun 3, 2025 at 11:12 AM

Key Points

Cost of funds reflects the bank's cost for money it lends, impacting interest rates and profit.
It is calculated by dividing paid interest by depositor's average balance.
Investors use it to gauge a bank's profitability and choose suitable investment options.

Whether you're investing in banks or simply want to use one, it's important to understand the cost of funds in banking. This figure is fundamental to both consumer interest rates and bank profitability, making it one of the more vital terms for you to know, regardless of your role.

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A pile of cash funds. — Image source: Getty Images.

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About the Author

Kristi Waterworth has been a contributing real estate and financial expert at The Motley Fool, covering real estate, investing, and personal finance topics, since 2020. Kristi has been interviewed by various TV media outlets and podcasts for her real estate investing expertise – from residential real estate to digital real estate and everything in between. Kristi’s journalist career spans over 25 years, and she has written about real estate investing, homeownership, and home construction specifically for the last decade. She was also previously a licensed Realtor and general building contractor before the Great Recession and housing market collapse. She holds a bachelor’s degree in American history from Columbia College in Missouri.

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