How Banks Profit from Your Money
When you deposit your money into a bank, it doesn’t just sit there. Banks use your deposits as a resource to make money in several ways:
- Lending Your Money Out
Banks lend your deposited money to others in the form of loans—like mortgages, personal loans, or business loans. They charge borrowers an interest rate higher than what they pay you in savings interest. For example, if the bank gives you 1% interest on your savings but charges 6% interest on a loan, they pocket the difference (5%).
- Investing Your Money
Banks also invest your deposits in securities, such as government bonds or stocks. They earn returns on these investments, which are usually higher than the interest they pay to account holders.
- Fees and Charges
Banks charge fees for services like overdrafts, account maintenance, and wire transfers. These fees might seem small, but they add up quickly and can represent a significant portion of the bank’s profits.
- Fractional Reserve Banking
Banks only keep a fraction of your deposit as reserves (cash on hand). The rest is lent out. For example, if you deposit $1,000, the bank might only keep $100 and lend out $900. This process, known as fractional reserve banking, allows banks to create money and increase their lending capacity. In short: Banks use your deposits to lend, invest, and charge fees, making profits by earning more on these activities than they pay in interest
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