How Do Banks Make Money?
How Banks Make Money- Fees, Fees, Fees
Ever wonder how banks make their money? They can't be offering to store your money for free? You're right; here's how banks earn money.
Diversified banks make money in a variety of different ways. However, at the core, banks are considered lenders.
Banks generally make money by borrowing money from depositors and compensating them with a certain interest rate.
The banks will lend the money out to borrowers, charging the borrowers a higher interest rate, and profiting off the interest rate spread.
Below are the main ways in which banks make money.
Whenever a prospective borrower applies for a loan (especially a home loan) many banks charge a loan origination or application fee.
And, they can take the liberty of including this fee amount into the principal of your loan—which means you’ll pay interest on it too!
What Banks don't want you to know
(So if your loan application fee is $100 and your bank rolls it into a 30-year mortgage at 5% APR, you’ll pay $94.40 in interest just on the $100 fee).
Account Fees
Some typical financial products that charge fees are checking accounts, investment accounts, and credit cards.
These fees are said to be for “maintenances purposes” even though maintaining these accounts costs banks relatively little.
ATM Fees
There will be times when you can’t find your bank’s ATM and you must settle for another ATM just to get some cash.
Well, that’s probably going to cost you $3. Such situations happen all the time and just mean more money for banks.
Commissions
Most banks will have investment divisions that often function as full-service brokerages. Of course, their commission fees for making trades are higher than most discount brokers.
Inactivity Fees
If your account goes inactive, also known as?"dormant," it will begin to accrue fees.
You can avoid this simply by making a deposit or withdraw, so there is activity on your account. Be sure to look into this before opening an account you plan to seldom use.
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Penalty Charges
Banks love to slap on a penalty fee for something a customer’s mishaps. It could a credit card payment that you sent in at 5:05PM.
What Banks don't want you to know
It could be a check written for an amount that was one penny over what you had in your checking account.
Whatever it may be, expect to pay a late fee or a notorious overdraft fee or between $25 and $40. It sucks for customers, but the banks are having a blast.
Wire Transfer Fees
You can?use wire transfers?if you want to send money to another bank or entity quickly.
These transfers typically happen on the same day. It is not the same as?ACH transfers?which can take a few days etc.
Fees depend on if the transfer is domestic or international and also vary depending on the financial institution.
Charges For Paper Statements
Some banks may charge for paper statements.
Also, if you need to request?archived statements, this can mean additional fees as well.
Going paperless is more environmentally friendly, easier to track, and efficient anyway, so definitely consider this option.
Minimum Balance Charges
Minimum balance charges are another way how banks make money.
So if your account balance falls below the minimum balance, then they will charge you a penalty fee.
It's best to find accounts that have zero minimum balances. So you have one less thing to worry about and pay for unexpectedly.
What Banks don't want you to know