why do money banks want money from you for loans when the money they give to you is not even in their vault ?
In: Economics
Financial institutions need a certain amount of money in checking accounts in order for them to be able to lend out money (be in credit cards, mortgage, car notes, etc). This law was put in place in order to protect consumers in case they need to take out cash from their accounts to ensure the bank would have enough cash for those people. Basically banks can’t lend out all the money they have from their customers in case they want their money.
The banks loan you money, with the promise that you will pay them back, plus extra later. If you don’t pay them back, they don’t make any money from the loan, which is the entire reason they loan out money in the first place. The bank may pay for something, like a car or house with loaned money on your behalf, and you have to pay them back or they take the car or house from you.
For some purchases, like a car or house, you may be required to pay some money up front in addition to the money the bank will pay through a loan, in case they are worried that you may not have enough money to pay them back, so that they still at least get some money from the deal.
[US] Banks are required to keep some fraction (currently 0%) of customer deposits in cash or cash equivalents. They can’t lend out any more money if that requirement isn’t met, and as the only way to loan out more would be to increase the amount of customer deposits you hold.
Also, banks usually earn a lot more from interest/fees than they back in savings account interest.
It is and isn’t. In the USA physical money is managed/printed by the federal bank. But If the fed prints more physical dollars it doesn’t actually create more money and just causes Inflation.
the concept of Money is actually created by banks during the lending process and now a days it’s mostly just numbers on a balance sheet, via credit cards & wire transactions, and doesn’t rely on physical money as much. The bank can accept a deposit and then go to the fed to borrow against that and loan out usually 10x of the money in deposit.
Then those loan payments become the cash on hand for the depositors when they need it and the bank gets to keep some for operations and profit… And rinse and repeat as needed.
The bank is really a middle man in the process and is needed because we can all go to one place for a mortgage, instead of hitting up 100 friends then paying each one back on a regular basis.
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