How Do Banks Make Money?
The chances are, you have some sort of bank account. It could be a checking account, savings account, or some other account that banks offer. In fact, almost 94% of American’s have some sort of affiliation with a bank. Banks are an important piece of the broader financial system. They offer a way from people to store their cash safely and securely. They also loan money to people and businesses in need of cash. So how do they make money? In this post, we’ll explain the main ways banks make money and what you can do to keep more money in your bank account and less in theirs.What You'll Learn
Top Ways Banks Make Money
As mentioned above, banks make money through a wide assortment of products. Mortgages, personal loans, business loans, and banking fees are some of the most common ways banks make their money.Mortgages
Banks thrive off of mortgages. Each time someone chooses to finances a property, banks can make tremendous profits. So how does this happen? Whenever you take out a mortgage, you will have to pay for the purchase price of the home plus interest charged by the bank. For example, if you purchase a home for $200,000 with a 5% interest rate over 30 years you will end up paying a total of $386,512, $186,512 of which is mortgage interest. That’s quite a bit of money for just one property! Mortgage rates are determined by many factors including the individual's credit score, market conditions, and the length of the loan.Personal Loans
If you need cash fast, banks will offer personal loans so that you can have it when you need it. These loans are typically structured with simple interest meaning you will pay a certain amount each month plus the interest accumulated. Personal loan interest rates are determined similarly to mortgages with your credit score being the largest factor followed by the amount of the loan, the length of the loan, and market conditions. You can expect to pay anywhere from 5% to 15% APR for your personal loan.Business Loans
Just as people might need money, so do businesses. And banks will happily lend them money profiting on the interest paid. Business loans will typically have lower interest rates than personal loans but come with several caveats. For most business loans, your funds can only be used for business expenses, some loans will even come with restrictions on what the funds can and cannot be used for. In addition, getting approved for a business loan might be somewhat more difficult for new businesses as banks will look for a history of sound finances. If you cannot get approved for a business loan, you can always consider a personal loan as they will not have any restrictions on how you plan to use the funds.Banking Fees
American’s spent $34 billion in overdraft fees alone in 2017. Fees are the easiest ways for banks to make money. Between overdraft fees, account maintenance fees, ATM fees, lost card fees, returned check fees, and more it’s easy to see how they can rack up the cash. Banks can charge fees for virtually anything, so it’s a good idea to always go over any potential fees when opening an account. Some of the most common fees are:- Account maintenance fees
- Overdraft fees
- Returned check fees
- ATM fees
- Lost card fees
- Foreign transaction fees
- Minimum balance charges