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Guest
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 Posted:
Thu Oct 27, 2005 12:01 am Post subject:
How do banks make money? |
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I wonder how banks make any money charging 6% interest for a
30-year loan. If you subtract 3 % for inflation, 1.5 % for overhead
you are just left wit 1.5% profit. Then you have to include the risk of
defaulting borrowers.
Since 90% of borrowers live paycheck to paycheck, one would think
the risk is quite high that the bank wont get all their money
back after 30 years. Plus 30 years is a long time and anything can
happen even to the most responsible borrowers.
So how they can make money on margins less than 1%?
Then the next question is why do average joes think they can take
the same money and get 10+% roi's if they put the money in the stock
market?
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Guest
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| Posted:
Thu Oct 27, 2005 12:01 am Post subject:
Re: How do banks make money? |
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In the study of economics there is an effect known as the
bank multiplier effect. Without going into a lot of details,
it means the same dollar is loaned numerous times greatly
increasing the return to the bank. |
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Frithiof Andreas Jensen
Guest
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Thu Oct 27, 2005 2:30 pm Post subject:
Re: How do banks make money? |
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| Quote: | I wonder how banks make any money charging 6% interest for a
30-year loan. If you subtract 3 % for inflation, 1.5 % for overhead
you are just left wit 1.5% profit. Then you have to include the risk of
defaulting borrowers.
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Pah: 6% - I got 4.12 % *fixed* until 2035.
The one-year rate is p.t. 2.16 %. And still you wonder why your banks can
afford Manhatten addresses??
| Quote: |
Since 90% of borrowers live paycheck to paycheck, one would think
the risk is quite high that the bank wont get all their money
back after 30 years. Plus 30 years is a long time and anything can
happen even to the most responsible borrowers.
So how they can make money on margins less than 1%?
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Very easily:
The bank actually does not care about what happens to the bonds, the
borrowers or indeed the future, because the bank is not lending anyone any
money. It merely charges for facilitating a transaction. When someone takes
out a mortgage, the morgage will be divied up in bonds that will be sold in
the market at some price. The bank will charge the buyer and seller a fee.
Whatever happens later is not the banks problem.
In the case of loans, that are not mortgages, the interest rates are usually
higher and conditions are stricter because the bank actually assume risk
here and it does not want it's precious balance sheet polluted by
non-performing loans. You must have noticed that they do not want business
with people who *need* a loan, those people have to go to the gray market,
where conditions are even worse and non-payment terms are really severe.
Even then, the bank usually only have to provide 5% margin for bad loans.
| Quote: | Then the next question is why do average joes think they can take
the same money and get 10+% roi's if they put the money in the stock
market?
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Surviver's bias:
The only samples one ever hear about are Survivors, the success stories. The
loosers disappear. This skews the statistics and hides the real odds.
That applies to many other areas too: Why are there still ghetto's, trailer
parks and squalor when MTV and NBF has so many people with that background
that "made it". ??
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David Efflandt
Guest
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| Posted:
Sun Oct 30, 2005 6:20 am Post subject:
Re: How do banks make money? |
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| Quote: | I wonder how banks make any money charging 6% interest for a
30-year loan. If you subtract 3 % for inflation, 1.5 % for overhead
you are just left wit 1.5% profit. Then you have to include the risk of
defaulting borrowers.
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Inflation does not enter into the picture. Basically they loan at a
higher rate than it costs them to borrow it, and they keep the difference
(free money). Some of it comes from checking and savings accounts that
they pay nothing or very little for (0.5-0.9% for example). The rest
comes from money market, CD's, or bonds. With rising interest rates, the
average margin between borrowed and loaned funds has decreased to less
than 3%.
But my bank just bought a credit card company, which can bump that margin
back up. They get 3% from the merchant for money that is only tied up for
a month or two (over 18% APR), even if you pay it off right away. |
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martin56
Joined: 01 Jun 2008
Posts: 11
Location: Grand Rapids, Michigan
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Sun Jun 01, 2008 10:55 pm Post subject:
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| They make money off fees, mortgages, and other forms of lending. |
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