Banks and Banking
The infamous bank robber, John Dillinger, when asked why he robbed banks, replied, "because that’s where the money is." The point of this quote is NOT that one should rob banks, but that at their simplest form, banks take money in what we call "deposits" and lend money in the form of loans.
To some people, banks are intimidating places, places where people wear ties and sit behind big desks. Try not to worry about that. Even if your own parents do not use banks, it is important for you to develop a relationship with a local bank if possible. Both Wells Fargo and Key Bank offer checking accounts for teens. Opening a checking account, and also a savings account, is the first step to developing your own banking relationship.
This relationship can save you a lot of money. Later, if you really need money, and you have built that relationship, you may be able to get a loan if you need one. This can help you avoid places that charge huge fees for loans, such as payday lenders, title loan companies and other places that charge up to 100 times more for the use of their money.
How are Banks Important to Me?
Banks protect your money from theft or natural disaster.
- In the United States, the Federal Deposit Insurance Corporation (FDIC) provides deposit insurance, which guarantees the safety of deposits in member banks, currently up to $250,000 per depositor per bank. The FDIC insures deposits at 8,246 institutions with $13.5 trillion in assets.
- Insured deposits are backed by the full faith and credit of the United States.
- Since the start of FDIC insurance on January 1, 1934, no depositor has lost a single cent of insured funds as a result of a failure.
- Bottom-line: Banks are safer place for your money than say in your mattress or buried under the sand with a big ‘X’ over it.
Banks use a system of credit analysis to determine whether to lend to a loan applicant. This credit score will dictate whether or not YOU will receive a loan and the terms of the loan.
- The biggest purchase in the average Americans life is his/her house. Because the value of property is so expensive, most Americans cannot pay the entire value of the home in the same way you buy a pair of shoes with cash. Thus, Americans are required to apply for loans to purchase a house. Banks do not provide this service out of the goodness of their hearts. Banks make money by charging an annual percentage of interest on the outstanding loan. (See: Time Value of Money, Credit Reports and Scores).
Many countries do not have this form of credit-based lending, and require substantial down payment on property. As a result, far fewer people own homes in these countries.
- Bottom-line: Banks can help you purchase a home without having to pay the entire balance at the time of purchase. Banks assess the level of risk on any loan based on your credit score. Therefore, if you desire to purchase a house with favorable terms, then guard your credit score with your life.
Business, Personal & Auto Loans
- Banks also offer different loans for which an applicant must have worthy credit. In addition, the bank will often take an interest in the property upon which they loan YOU the money to purchase. For example, if a bank loans you $12,000 to purchase a used Honda Accord then in addition to the interest they charge to compensate their risk (risk=opportunity cost & risk of default), they also take an interest in the vehicle. If you default (do not pay your bill including interest) then the bank can repossess your vehicle and sell it to satisfy your outstanding loan. Furthermore, in the event that they sell the vehicle for less than $12,000, say $11,500 then they can hold you liable via a court and hold you responsible for the outstanding $500.
- Bottom-line: There are various loans that banks issue. Banks often take a security interest in the underlying property which the debtor borrows to purchase.
Just a few more fun facts about banks!
- Banks offer very sophisticated financial products and services, which are mostly excluded in this article.
- Banks are one of the most regulated industries because of the complexity involved in banking.
- Finally…Personal banking is relevant to almost every American. Your credit rating, financial history, and your income impact the risk associated with a bank lending to you. It is important to have a good credit rating and income flow in order to receive loans to finance large value products such as houses and cars. By providing an insured place for your money, banks are the grease that oil the tracks of transactions in our society.