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.
Ask a question
See also
- Why Do We Have Different Kinds of Taxes?
- Why Do Prices Change So Much?
- Why Do We Use Money Instead of Bartering?
- Why Do Prices Go Up So Much When There's a Shortage?
- Why Do We Have Different Kinds of Coins?
Discussion
Recent activity
Categories: Economics · banks,interest rates,finance