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Discussion in 'Community Discussion' started by tkepongo, Feb 13, 2008.
How do finance companies make profit? I mean, there's interest...is that it?
Every transaction they are involved in includes a commission or a fee. Hence how they make a profit. They make their money out of fees and commissions.
They borrow money at incredibly low interest rates and loan it out again at incredibly high interest rates. How much do you get on your savings account? Less than one percent. You're loaning that money to the bank so they can charge some schlumpf 21 percent on his credit card.
my checking account gets 5% interest ....
This is true, and it's why if everyone tried to withdraw all of their savings from one bank at once, it wouldn't be possible, as most of your savings go straight into someone else's pocket in the form of a loan.
And to add, look at simple mortgages.
Take a 250,000 loan at 6% for 30 years.
The homeowner will pay back about $540,000 over 30 years, or about $800 per month in interest fees.
The bank gets the money to loan at a cheaper rate. In this case, let's say 4%. They will pay back about $423,000 over 30 years, or about $500 per month in interest fees.
The difference of $300 minus administrative fees is their profit on the loan. Banks tend to have a large number of loans out there working for them, so let's say you have a small bank that has 100-1,000 such loans. That would be $30,000 to 300,000 per month, or 360,000 to $3.6 million per year.
And this is basically guaranteed, reliable, steady income because most folks don't want to loose their homes.
Of course bigger banks have more loans of bigger values so this really adds up over time!
Note, the above is a simplistic example to illustrate a point and is not based upon actual data.