Home » Types of Investments Banks make a profit? check all that apply.

Types of Investments Banks make a profit? check all that apply.

The types of investments that banks use to make a profit are,

Have you ever thought about, why you have a free checking account? Obviously, it isn’t because your bank is kind. Banks make a lot of money. The kind of money that leads to the unseemly Big Business compensation we hear about all the time.

wondering 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.

Commercial banks are profit-seeking organizations that seek benefits in a variety of ways. The primary source of profit for banks is lending money and other advances at higher rates than the cost of them.

Banks can ensure that they can profit from their customers in the future by purchasing stocks and bonds, as well as properties and loan rights. For example, they offer mortgages with an interest rate that includes the cost of the bank’s services. The diagram below depicts in detail how banks make profits.

Types of Investments Banks make a profit? check all that apply.

A Penny Saved Is a Penny Lent

It all comes back to the fundamental way banks make money: banks make loans with depositors’ money. The amount of interest collected by banks on loans exceeds the amount of interest paid to customers with savings accounts—the difference is the banks’ profit.

For example, You currently have an emergency fund of $10,000 in a high yield savings account that may pay 1.50% APY. The bank uses that money to fund someones:

  • Mortgage at 5.50% APR
  • Student loan at 6.65% APR
  • Credit card at 16.99% APR

Your bank may have paid you $150 in a year’s time but they earned hundreds or thousands more from the interest on loans (made possible with your money). Now, think about this process repeated with millions of banking customers and billions of dollars.

Related: Top 10 Best Cryptocurrency to invest in

Charging of Fees, Fees, Fees

Yes, banks make a lot of money banks from charging borrowers interest, but the fees banks change are just as lucrative.

  • 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.
  • 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. 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.
  • 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.
  • Application fees. 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! (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).

Banks have recently come under fire for excessive rate rises and fees. Giving banks business may appear to be putting yourself in danger, but it still beats hiding your money under a mattress. Understanding how banks work, on the other hand, will teach you where to look for fees and how to avoid lining banks’ pockets by paying more interest than you earn.

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