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How do banks generate income?

Banks make money from the services they provide. They make money by charging customers interest on various loans and bank charges.

As hubs for money and financial services, banks are concerned with lending money and securing it for their customers. But how do banks make money? As with any other for-profit business, banks charge money for the services and financial products they offer. The two main offers that banks benefit from are interest rates on loans and fees related to their services.

Read on for a breakdown of these key services and find out how banks are making money from them. Along the way, find out about good money management practices that will keep banks from making money from you.

interest

Interest is charged to borrow money. Banks offer a service to customers by lending money, and interest is how they benefit from that service. Usually, interest is calculated as a percentage of the amount borrowed.

Banks charge interest on a variety of products and services such as credit cards, loans, and mortgages. The interest rates vary for different offers. See the table below for examples. They also fluctuate over time and are based on the economy. For most of 2020, 30-year fixed rate mortgage rates fell to historic lows, hovering around or below 3 percent.

Services banks charge interest

Average
interest rate

30-year fixed-rate mortgage

3.11%

15-year fixed-rate mortgage

2.61%

Private loan

9.65%

Car loan

2.49–6.76% depending on your creditworthiness

Credit cards

13–27% depending on card and creditworthiness

Swell: Freddie Mac 1 2 | Federal Reserve | US News 1 2 |

When a consumer takes out a loan or takes out a loan, they are charged interest until the money is returned to the lender. As an example, consider a $ 5,000 personal loan with an average interest rate of 9.65 percent. If it takes two years to repay the $ 5,000 personal loan with one payment of $ 230 a month, you will end up paying about $ 5,566 total on your loan.

That means the bank will earn $ 566 in interest on your loan. Banks use a small part of this earned money to pay interest to customers who have deposited money in savings or checking accounts. Whatever is left, the banks keep.

Bank charges

Banks make a significant chunk of their money by charging customers for using their financial products and services. Fees take many forms, but are often billed to create and maintain a bank account or to carry out a transaction. These can be recurring or one-time costs. All banks should be informed in advance of all of their fees and disclose them in a place that is accessible to their customers. Look for a fee schedule online or in the fine print of your financial documents.

It is important to educate yourself about the types of fees banks charge so that you can work for your own financial well-being. Knowing what certain fees are and why they are charged is an excellent way of managing the money you have in the bank and preventing mistakes or errors from weighing on your budget. Learn more about common bank charges below.

Insufficient Fund Fees (NSF)

Insufficient funds charges are applied when a customer makes a transaction but does not have enough funds to pay for it. The transaction "returns" or "bounces" and the bank charges the customer an NSF fee.

Overdraft fees

An overdraft occurs when your bank balance drops below zero. An overdraft fee is charged and interest may even be charged on the overdraft as the bank may consider the borrowed money as a short-term loan.

ATM fees

ATMs are charged for a number of reasons. If you are using an ATM that is not connected to your bank's network, you will most likely be charged a fee for this transaction. An additional fee may apply if you make too many ATM withdrawals from your account.

Late payment fees

Fees are charged on credit card or bank statements when a customer misses a payment or is late in paying their bill. Due dates are listed on bank statements, regardless of whether they are on paper or online. So make sure you know this data so as not to miss a payment.

Minimum balance

Certain bank accounts have a minimum balance required to remain in the account. If you fall below this minimum balance at any time, you will be charged a fee at the end of the month. If you do not meet the minimum balance required for your account, your bank may even close your account.

Withdrawal fees

Depending on your account, you may have a certain number of withdrawals that you are allowed to make per month. Checking accounts are for transactional purposes and can allow a certain number of withdrawals before a fee is charged. Savings accounts, on the other hand, often have a stricter limit on withdrawals, with the federal limit being six withdrawals. If you make more than the number of withdrawals allowed, you will pay a fee each time.

Transfer fees

There is a transfer fee when you send money electronically. They are typically used to safely and securely transfer money over long geographic distances.

This is how you avoid bank charges

Banks benefit from charging customer fees, but you can take steps to avoid them. While not all banking fees are avoidable, use these tips to prevent you from losing money to unnecessary fees.

Tips to avoid unnecessary bank fees

Tip 1: Use the online services

Most banks have online banking services that allow you to access your accounts remotely. Take advantage of these services by signing up for an online account or by logging into your bank's mobile app. Be careful not to share your login credentials with anyone and take appropriate security measures, such as: B. using a strong password or enabling security questions.

Tip 2: monitor your balance

Once you have access to an online banking platform or app, you can keep an eye on your accounts. Check your balance so that you do not overdraw and that an insufficient money or overdraft fee is being charged. You can also use this easy online access to monitor your account for transaction errors or fraudulent activity. If anything looks suspicious, notify your bank immediately.

Tip 3: set up automatic notifications and payments

Human error can lead to costly banking fees. You can use your app or online banking platform to automate loan payments, be notified when a direct deposit is made into your account, and set notifications when your balance falls below a certain amount or falls into an overdraft. Let these processes do the work for you and never spend a dime on bank charges again.

Tip 4: sign up for Direct Deposit

Direct deposit is another easy automated process that can help you avoid unnecessary fees or consequences. Some bank accounts have a minimum balance in order to keep them open. If your account falls below this amount, the bank may charge a fee. Set up a direct deposit to ensure your hard earned money is coming into your account and keeping it open with no fees.

Tip 5: don't spend too much

A great way to never charge overdraft fees or NSF fees is to not over-spend. Try to live within your means and do not spend more money than you actually have. Build an emergency fund so you don't have to overdraw your account or take out a loan if the unexpected happens. Balanced money management and preparation are key to maintaining your financial wellbeing.

Tip 6: try to use free services

Many banks offer free services such as free checking and savings accounts, money transfers, and certain free ATMs. Familiarize yourself with these services and their limitations in order to get the most out of them. Try using your bank's ATMs to avoid ATM fees and choose a free checking and savings account that suits your needs.

Banks make money from the interest and fees they charge their customers. Keep your money in your pocket and not with the banks by following good money management practices. Try to pay off your credit card in full each month to minimize interest payments and keep a close eye on your balance so you don't get charged extra. By practicing good money habits, you are actively protecting your financial well-being.

Sources: Bureau of Consumer Financial Protection 1 2 |

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