Banks make money by borrowing your money and lending it to someone else at a higher rate. It’s like when you lend your friend $10 for a week, but they give you back $12, the extra is how banks earn their profit.
How it works: When you save money in a bank, they pay you interest as a thank-you. But if they loan that same money to someone else, like a business or another person, they charge them a higher interest rate. The difference between what the bank pays you and what they get from the borrower is their profit.
Examples
- You save $1000 in a bank with a 2% interest rate, after one year, you get back $1020. The bank lends that money to someone else at 5%, making $1050 and keeping the extra $30 as profit.
- Your bank charges you 6% for a loan but only pays 2% on your savings account, they keep the difference as their profit.
- A bank borrows $1 million from another bank at 4% and lends it out at 7%. The $30,000 spread is their extra income.
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See also
- How Did the First Banks Start?
- How Governments Pay for Their Debts by Printing Money
- How Do Banks Make Money from Loans?
- How Do ‘Stock Markets’ Actually Work?
- How Do ‘Currencies’ Get Their Value and What Determines It?
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