How Do Banks Make Money from Loans?

Imagine you borrow $100 from a bank, and they charge you $120 to pay it back later. That extra $20 is how the bank makes money! When people take out loans, banks get more money than they give out, that’s how they become rich.

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Examples

A child borrows $10 from a piggy bank and pays back $12 later.
You take out a loan to buy a toy, but you end up paying more than the toy costs.
A bank gives you money for your birthday party, and you return it with some extra candies.

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Categories: Economics · loans,banking,finance