Have you ever wondered why banks pay you interest to keep your money in an account that they don’t charge you a monthly fee for? You don’t do anything except keep your money in the account.
If banks don’t charge a monthly fee for having their account, then how will they make money off of you? They can’t seriously be offering to store your money for free? Well, they’re not. Let’s see how they make their money.
Save a Penny, Lend a Penny
Banks used to offer insanely high savings account interest rates of 5%, maybe even more. But how do banks afford to do this? They use the money deposited by their customers to generate loans for other customers.
Money collected from interest rates on a loan will be far greater than the interest they will be paying you for keeping a savings account. The difference between the two will end up as profit for the bank.
For example, say you have $10,000 in your savings account that earns 1.5% interest each year. The bank will use your money to be able to fund someone else’s loan or credit card with interest fees that range anywhere from 5.5% to 16.99%.
So, even though the bank may have paid you $150 in interest for the year, they could have made thousands from the interest paid on the money they lent out that was made possible by you having your money in their bank.
Why Doesn’t My Money Go Away?
If the bank uses the deposits you make into your accounts to fund other loans, then why doesn’t your money go anywhere? It’s still available for you to withdraw, so how could it possibly be lent out to someone else?
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When you deposit your money into your bank account, that means the bank has earned your business. This gives them the financial capability to loan out some of the money that they have in their reserve.
Fees on Fees
Banks make a lot of money by charging interest to their borrowers, but the fees they charge earn them just as much if not more money each year. These fees include account fees, ATM fees, penalty fees, commissions, and application fees.
While some accounts offered by the bank might be free, others have a monthly charge that you have to pay to keep your account in good standing. These fees can be charged with checking accounts, investment accounts, and credit cards.
It is said that these fees are used for the “maintenance” of the account. In reality, it costs banks a very small amount of money to manage your account and your money.
If you can’t find an ATM that belongs to your bank, you may need to just find the closest one to you to take out some money. By using this other ATM, your bank will charge you a fee, and the ATM will charge you a fee.
This kind of situation happens all the time and banks expect it to happen. That is why you will notice fees when you use ATMs that are not owned by your bank.
There is a penalty fee for just about everything when it comes to banking. Maybe you made your credit card payment a couple of minutes after the end of the business day. Maybe you wrote a check for one cent more than what you have in your account.
It doesn’t matter what the scenario might be—if you overdraw your account by more than $5—you can expect to pay a fee anywhere from $25 to $40. This is the furthest thing from ideal, but the banks are racking up the cash on these penalty fees.
If a bank has an investment division, it will often function as a brokerage. This means they will earn commissions for making trades, and the commissions will be higher than discount brokerages. This means more money for the banks.
If you are applying for any kind of loan, your bank may charge an application fee. This may also be known as a loan origination fee. What’s more, they can bundle this fee into the loan amount and you will end up paying interest on it, too.
Say you have an application fee of $100 that gets rolled up into the principle of your loan. If the loan is a mortgage, that term is probably 30-years and says the interest rate is 5%. You will end up paying a total of $194.40 for your $100 application fee.
Are Banks Safe?
Seeing that banks lend out the money you deposit is a scary thing to think about. What if the borrower doesn’t pay back the money the bank loaned them? Won’t you lose that money?
Thankfully, the answer to that is no. Banks lend money to several different kinds of borrowers, and there will always be someone who doesn’t pay on time. Banks will try to reduce the risk of this, but things happen.
Do I Have the Right Bank?
If you aren’t happy with your bank or you think there might be one out there that can fit your needs better, there is no harm in shopping around. Look at what the interest rates are at other banks compared to your current one. You might be able to find a bank that pays a higher-than-average interest rate.
You might also consider working with a financial advisor. They will be the most familiar with different banks and systems, allowing them to help you find the best bank possible for your needs.
Should I Keep My Savings in the Bank?
It is not a new thing to have very little trust in banks and financial institutions. It is also extremely common to look for alternative places to keep your money than in a bank account. The FDIC protects your money in a bank account, but there is a limit of $250,000 per depositor.
This limit applies to the money you put in and the interest you earn on it. If you have more than this in your bank account, any amount over $250,000 is put at risk.
If you are interested in an alternative savings option, take a look at a few of them here.
The U.S. Treasury and Federal Reserve offer you the opportunity to trade your money for securities. These securities will usually have a maturity date of 20 years or more and pay interest on a semiannual basis until then.
Precious Metals and Jewels
One thing that always seems to hold its value is a precious metal. The most common types are gold, silver, platinum, and copper. They retain their value, they might even appreciate.
Jewels are also incredibly valuable and will more than likely continue to be. They are objects that can be tucked away and hidden but can also be touched and seen when you want a reminder of the security they bring you.
Banks want your money so they can loan your money out to other customers. By lending out your money and charging interest on that amount, the bank will make enough money to pay you the interest owed on your savings account, as well as keep a nice profit for themselves.
Will you end up losing your money if the loan isn’t paid back by the lender? Luckily, this answer is no, you will not lose your money. Banks will make enough money from the other money they lend out and the other fees they charge to ensure your money doesn’t go anywhere.
There are alternatives that you can consider if you aren’t interested in keeping your money in a bank, so take some time to check those out!