How banks get rich off your money
Updated: May 24, 2018
I recently read something that was so shocking. It was like being hit between the eyes with lightening. It wasn't even what this person shared, it was the thought and the math I ran afterwards that really caught my attention. The person sharing the information pointed out how willing we are to put money with a very little interest paid to us and then borrow from the same bank for a car or RV or piece of real estate for a much higher interest rate.
He then said, "only a banker can loan your money out and still make money on your money while it is being used."
This is when my curious little mind went to work on the numbers. I happen to be discussing the purchase of a Motor home with a neighbor of mine. He told me he had the cash to purchase the Motor home but wanted to have his savings liquid. The Motor home would carry a loan of $100,000.
Here's where it gets interesting! This neighbor had $100,000 sitting in a money market account earning .25%. That means he will earn $250 that year for parking his money at his bank. Crappy right! But the RV loan is going to carry an interest rate of 5.74% each year for the 10 year term. His payment will be $1,097 per month.
At first, I thought the bank was just earning a 5.49% spread on the interest rate. That's the 5.74% minus the .25% he is earning on his money. My first thought was wow that is a great spread for the bank. My friend is getting ripped off! Then it hit me, this would be true if this was an investment of the banks money, but it is my friend’s money. The bank doesn't use its own money, it is using customer’s money on deposit to fulfill these loans. The bank is really only putting up the $250 of interest.
So then I jumped on a car loan calculator to see what kind of interest my neighbor would be paying. In year 1, he would pay the bank $5,541 in interest. Now, having this information, I could jump on an ROI calculator to see what the banks return would be on their $250 investment.
The bank is making a 2,116.40% return on their $250 investment, all while using my neighbors money to lend it back to him as the middle man. This is when my eyes bugged out of my head and my jaw dropped open. I’m sure I looked like a funny Warner Brothers cartoon character. I knew banks did well based on how many locations and beautiful buildings they own, but WOW! was I shocked by how well they are doing using our money.
Each year he holds the loan, the banks return lowers since more of his money goes to principal and less to interest. However, have you noticed that at around year 3-5 of having a bank loan, the bank starts heavily marketing to you about refinancing your car, RV or home? This is to keep you in the heaviest interest time of your loan so they can make more interest off you.
My hat is off to them for this, but I’ve chosen to be my own bank through the insurance contracts I own and educate people on. Sure, we don’t make 2,116% returns but we do much, much better than the bank and we can actually save on interest and depreciation with major purchases.
Be aware of how banks behave with your money and the profits they are making off of you. But also, learn from them; learn not to behave with your money the way they teach you, but learn to behave with your money the way they do. That is the key. Success leaves clues and now you know how banks behave with money.
This is why I educate people on owning a properly built private life insurance contract that allows them the advantage of being their own source of financing on major purchases as I’ve described in my book and in other areas of my website.
To see how purchasing an RV or Motorhome through your insurance contract benefits you, read chapter 11 of my best-selling book, A Bridge Over Troubled Wall Street or click on the work with me tab and I can email it or go over it with you in a private consulting session.