how do banks make money?

Answer 1

Basically banks make money off your money.

When you put your money in a bank, the bank invests your money out into the global economy which is comprised of things like stocks, bonds, mutual funds, and things of that sort.

For the past 20 years or so, these type of investments have averaged about at 12% rate of return, while the average checking account you get at a bank will give you maybe up to 3% and a traditional "savings account" will return even less.

So with that scenario, when your bank is getting a 12% rate of return on your money, they're more than happy to give you your meager 3-or-so-percent. Result is a big profit for the bank.

And that is how banks make money.

Answer 2

Historically, it's been that they pay you interest on your savings or CDs, but loan the money out at a higher interest rate.

However lately, I think it's really been more fee based. Oh, they say they're giving you free this and that, but if you make even the tiniest mistake, BAM you're hit with a $39 fee. Make an overdraft, go over your credit card limit, pay a loan or credit card a day late, and they sock you with fees.

That's why I quit using banks years ago. Now it's credit unions or brokerages for me from now on.

Answer 3

They let you deposit your money with them and pay you "x" interest rate.

Then they take your money and loan it out to other people in the form of mortgages and loans and charge them "y" interest rate.

"Y" is perhaps 10 or 20 times the size of "X". Pretty sweet deal for them yes?

Answer 4

A combination of net interest (interest they make from borrowers minus interest that they pay to depositors and other lenders) and fees (account fees, service fees, transaction fees, etc.).