If you’ve ever wondered how banks make money or if you’re just interested in their bottom line, this guide will explain seven ways that banks use your money to generate profits. Whether they are trading stocks, lending money, or using an overdraft fee, this post will detail seven different ways banks can profit from your hard-earned dollars and cents. You may be surprised that banks can still profit from your financial activities even if you don’t do business with them directly.
How Banks Use Deposits
Banks aren’t just holding onto your deposits – they’re actively using them. When you deposit money, it doesn’t just sit in a vault. Instead, banks lend it out to others. Let’s take a look on how your deposits are the foundation of a bank’s lending business.
Earning Interest On Your Deposits
Banks pay you interest on your money. At a minimum, they will pay it on your checking and savings accounts. They may offer higher interest rates on higher balances or longer-term deposits in some cases.
There are no specific laws that require banks to pay interest on checking or savings accounts. They are private companies and have the power to set their own rates of return if they choose.
Picking Your Pocket With High Fees
Bank fees can make a dent in your pocketbook, but some banks are worse than others. Find out which ones might be picking your pocket and how you can avoid it.
It’s also worth noting that wildly varying fees isn’t exclusive to banks, and you should always ensure you use the financial provider who offers the most competitive rates for their service. This includes when buying everything from reloadable visa cards, to virtual gift cards, to making online transactions.
Not Telling You About Rates Outside Their Bank
The average American household has approximately $7,000 in credit card debt. Banks make about $2 billion each year from people who don’t even realize they have interest rates on their credit cards outside of their bank’s rates.
Taking Advantage of High-Risk Loans
If a bank can assess that you have a high risk of defaulting on your SBA loan rates (such as those who are self-employed), they will charge you higher interest rates than if you were employed by someone else.
SBA loans are available for selected businesses that qualify as Small Businesses and can range from $1,000 to $5 million. If you have a confident and worthy business plan, you should be able to get approved for an SBA loan with a low-interest rate and flexible repayment terms.
Selling Your Information
So your bank is making money from your accounts — but it’s also using that information for its gains. That could mean targeting you with marketing offers or selling your confidential data and credit history to third parties.
Trading Stocks and Bonds
There are two main ways that banks make money on your deposits: interest and investment income. Interest is pretty straightforward — when you deposit money in a bank, they’ll often pay you a small amount of interest.
According to Lantern by SoFi, “Investment income can come from three different places: selling your investments, lending out your deposits, or selling loans you’ve originated.”
Investing in Alternative Sources of Income
While most people need to have a steady source of income, such as a full-time job, alternative sources can help diversify their income and be more resilient against economic downturns.
Conclusion
In the end, banks are businesses aiming for profit, just like any other. Their methods, from using your deposits for loans to charging fees, all contribute to their bottom line. Understanding these methods gives us insight into the complex, yet intriguing world of banking finance.
