How Banks Make Money – Debtfree Magazine


Exactly how banks make their money is slightly more complicated than you may first realise.

Yes, banks do make a profit by charging for services like protecting your money, and by charging people who want to borrow money fees (such as initiation fees and interest on money they have made available).

On the surface, it may appear that banks lend you their money but interestingly the money they have, is often not from piles of gold or cash that they have lying around in big bank vaults. These days, banks are allowed to lend out a lot more money than they actually have on hand.

What often happens is that the bank is lending people money now that the same person promises to pay back in the future.

‘Sounds weird right? But this is kind of how it works’

Sounds weird right? But this is kind of how it works. They give you your own future money based mostly on your promise to repay, and a little bit of that money they have available right now.

And they have all sorts of insurance and other things in place to protect them, if you miss payments (including large armies of collections agents and attorneys to chase you).  But there are some deeper layers as well.



Source link