How Do Banks Work?

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Banks work by accepting deposits on cash accounts and loaning out money to earn interest. Find out how banks work on a margin to become profitable in a short period of time with information from a registered financial consultant in this free video on banks.

Part of the Video Series: Money Management
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Video Transcript

This is financial adviser Patrick Munro talking about, "How do banks work?" Banks are designed as community service organizations; however they are private businesses and they're designed to make a profit. What banks do is they take in what's called deposits. In other words when you have a paycheck and take it to the bank for safety purposes, you can deposit that money with the bank. The bank will pay you an interest rate, lower on a savings account, even lower on a checking account. But they have now got the deposit in their portfolio. What they will then do is turn around and lend money out at a higher interest rate through things such as mortgages, credit cards, car loans and various other financial instruments that are debt related. Banks work on what's called a margin. So what they pay you, for instance two percent on your cash accounts, and lend out and auto loan at seven percent, the bank will make the difference. Which is five percent. So banks can become very profitable in a short period of time. This is Patrick Munro talking about how do banks work.

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