How Do Banks Make Money: A Simple Guide

Our world is driven by capitalism. You need only walk down any high street or through any mall to see just how much our culture is driven by money. And we aren’t saying that is a bad thing. Sure, capitalism has its issues. But so does any societal system.

Capitalism has many benefits for both our culture as a whole and on the individual level as well. But our society only functions as it does because of the key building block holding everything together. The Banks.

Love them or hate them, Banks are everywhere. Every mall, every high street. Every metropolitan cityscape or small-town village. Nowhere is safe from the spread of banks. And a common question we get asked is this: How do banks make their money?

 

Understanding Banks

It is easy to think that banks seem to function without actually making money. They simply store your money and move it around. So how do they pay their staff, afford rent and upkeep? And how is it profitable for anyone to become a banker?

We have spoken to a few experts, such as those at blutin and at Smythes to better understand exactly how banks turn a profit. We are going to break it down for you in simple terms.

 

Loans

This is the key moneymaker for any bank. Loans. Anyone can walk into a bank and apply for a loan. Of course, you need to get the bank’s approval with a solid reason for the loan. And the bank will want to be sure you can pay it back.

All banks will have an interest rate attached to the loan. This is unavoidable. This is how they make money. Say you take out a loan for $100. With interest you could end up paying back $120 to the bank eventually, making a nice $20 profit for the bank.

Now imagine that on a scale of thousands of dollars interest per day. A bank only brings in as much money as they are willing to lend out.

 

Investing

While a physical bank is often designed to store and manage your money, the companies that own the bank will have their hands in many different avenues. Investments and stocks are one area these companies love to dabble in. And where do they get the money?

From you. When you store your money with a bank, you are giving them permission to spend it. Relax, they don’t actually spend your physical cash. While it is in their care, they will use it to invest and bring in profit. This profit is returned to you as interest. The more money you leave with a bank, the more interest it accrues. It’s a win-win situation and a great way for both the bank and you to profit.

 

Mortgages

Mortgages are just very specific loans. They are for buying property exclusively and follow different repayment rules to a traditional loan. The reason for this is due to the size of the money being borrowed and the nature of the investment. Since you will be living in your purchase, the bank is sure you aren’t doing a runner with the money, so the repayment scheme isn’t as taxing (although it is still noticeable) and like a normal loan, the bank profits off a mortgage in the form of interest on your repayments. And, if you can’t pay up, they can simply take the property and sell it for profit as well.

We hope this has highlighted how banks make their money in a helpful and insightful manner.

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