How Does a Bank Work?

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The Definition of a Bank

  • A bank is an establishment or institution where individuals can go to handle their finances. Banks primarily make their money by lending money to their customers and charging interest on the money borrowed. Banks can also collect money from their customers when they charge fees for the use of their ATMs, fees for accounts under their minimum balance, and fees for overdrawing an account. In order to understand where banks get the money to lend out, you must look at the bank's other function. Banks are available for people to deposit their money for safe keeping. It wouldn't be safe to keep your retirement money under your mattress. When a customer deposits his or her money, they are giving the bank permission to borrow the money. This borrowed money is what is used for the loans to other customers. The bank pays a smaller amount of interest to the customer who allowed them to borrow the money and charges a larger amount of interest to the the customer they lent the money to. The bank makes money from the difference in the interest.

Available Bank Services

  • There are three main services that banks provide to their customers. They provide a way for customers to save their money for the future. They provide a way for customers to obtain money for home repairs, car loans, or college tuition, and finally, they provide a way for customers to make educated investments.

Saving with a Bank

  • It is wise for customers to consider keeping their cash in a savings account at a bank. Cash can get lost, stolen, or catch on fire, but at a bank your money is guaranteed up to $100,000. The bank also pays you a small amount of interest for allowing them to use your money while you keep it there. Savings accounts are great because you have access to your money at any time. That is one thing that makes it different than an investment. Investments usually have your money for a certain period of time so getting it if you need it is hard. Banks offer three common savings accounts that most customers choose from: the normal savings account for the adult, the trust savings account that is controlled by an adult, but meant for a child, or the money market account. Money market accounts pay the highest interest for a savings account, but they have minimum account balances that must be kept at all times.

Investing with a Bank

  • Banks are helpful in advising and assisting you in investing your money. A simple way to get started is to get a bond or a CD. You must be willing to leave your money in one or both of these accounts for a length of time without touching them. If you take the money out any sooner than the date of maturity, you will be responsible for all kinds of fees. The bonus is a very high interest rate. Just be 100% positive you won't need that money for the duration assigned. You can also invest in the stock market, but this can be very risky. Stocks have the highest possible payout of investments, but they can also lose you your money. You can get some great stock advice from the expert at your bank. They can even handle the stocks for you in a portfolio. If you choose to do this yourself you will need to study a lot and even then it can be tricky. If you are too scared to play the stock market you should consider a mutual fund which is less risky.

Borrowing from a Bank

  • Banks are also great when you have a specific financial need such as college tuition, home repairs, buying a car, or starting a business. Banks will lend you money if you have a good relationship with them or you have a good credit score. You can speak to a bank's loan officer and fill out an application. The bank will give you the money you need, but they will also require you to pay back the borrowed amount plus interest. They will organize a re-payment plan at the time you borrow the loan. Make sure you are capable of paying the money back. Remember this interest is how the bank makes money. The amount of interest the bank charges you depends on how much of a risk you are. If you don't have good credit, you are going to be charged more. If you have a good job that you have been with for years, your interest rate will be lower.

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