How Do Banks Work?

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What is a bank?

  • A bank is a building where people go to handle their finances. Banks make money by lending money and charging interest on its loans. Banks also make money by charging fees for various different things such as ATM fees, overdraft fees or having your account under a certain balance. So where do the banks get money to loan out? Banks also allow people to deposit money. When a customer deposits her money, she is allowing the bank to borrow her money. The bank pays the customer interest for allowing her to borrow the money. The interest paid to the customer is less than the interest that is collected on the loans so the bank still makes money.

Services the Bank Provides

  • The bank offers the community a way to save its money, invest its money, and borrow money for things it needs.

Savings

  • Rather then allow your money to sit at home and potentially get stolen or lost, you can choose to keep it at the local bank. The bank will keep your money safe and allow you to earn interest on it. The interest rate is usually quite low for a savings account which is why some people choose to invest their money. Using a savings account, however, is convenient because you can get to your money any time, whereas investments usually have your money tied up. There are three basic savings accounts worth mentioning--a normal savings account for the average American, a trust savings account for a child and a money market account. Money market accounts require you to keep a minimum account balance at all times, therefore they pay a higher interest rate.

Investing

  • There are several ways a bank can help you invest money. You can start off with a bond or CD. The money in these accounts is required to stay there for a certain length of time. If you withdraw it early, you face all kinds of penalty payments. If you are comfortable you won't need the money right away then you can make a much higher interest rate then a savings account. You can also invest in stocks. Stocks are the most risky and you can actually lose your money. You can hire expert to guide you through the process so you come out a winner. You can do it yourself, but it would take an awful lot of studying. The reason people take a risk with stocks is because they have huge payouts if you do it right. You can also invest in mutual funds which have risks like stocks, but not as drastic. Speak with a representative from your bank to learn more.

Borrowing

  • You can go to a bank and borrow money for several different things: college loans, mortgages, car loans, home equity loans, business start up loans and even personal loans. If you meet the bank's qualifications you can get a loan. That loan will have interest payments attached to it, which is how the bank makes its money. Your interest rate is determined by how much of a risk you are to the bank. If you have a good steady job and a good credit score then you are less of a risk than someone who has a low paying job and a bad credit score. You may get an interest rate of seven percent while the other guy gets one of 12 percent.

  • Photo Credit Piggy Bank
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