Lenders don’t lend their money just for the sake of it. They do it to make money. That much you need to know. The difference between brokers and lenders is the latter use their funds while the former makes money by serving as an intermediary between the lender and the borrower.

The funds used by lenders to fund loans can be the depositor’s funds, or they may borrow from larger banks. Lending institutions pay a low-interest rate on savings account, money market accounts, and other depositor accounts.

The money collected from these will then be used to lend borrower money. This time, it will be at a higher interest rate such as with credit cards and loans. It is how lenders typically make money, which somehow makes them look like the bad guy.

However, you should know that lenders have an essential purpose in the economy. One thing to keep in mind when it comes to lenders is they are mainly interested in maximizing their profits. That being the case, you should know that taking a loan from a lender comes with a caution.

It Will Cost You to Borrow Money

If you are a credit card user, it is crucial that you understand all about the fine print of your agreements. Your credit card agreement is the one thing that gives you protection against the harrowing costs of borrowing money. On that note, here are some basics on borrowing money:

• Interest – It refers to the payment for the pleasure of using another person’s money, such as your loan or credit card. Lenders can put as much as 30% interest on the money you borrowed.
• Fees – Some credit card companies and banks charge several fees, such as annual fees, late payment fees, and more.
• Finance Charges – These include all the fees and interest of the loan or credit card, added together and stated as an annual percentage rate.

Ways Lenders Make Money Out of Your Mortgage

There are multiples ways mortgage lenders make money. Some of them are:

• Origination Fee – a fee of around 0.5% to 1% of the loan value due together with the mortgage payments. It increases the overall interest rate and the total cost of the house.
• Discount Points – at the closing, discount points help to buy down the interest rate of the mortgage. Typically, one discount point is equal to 1% of the amount of mortgage.
• Loan Servicing – lenders can make money by servicing the loans through the mortgage, which earned them a periodic fee or a small percentage of the loan.
• Loan Closing Fees – expect some fees at the closing of a mortgage deal. Every lender charges different closing fees.
• Mortgage Backed Securities – lenders group loans of different profit levels together into mortgage-backed securities, which they sell to gain profit.

These are among the different ways that lenders can gain money by letting you borrow money. The most obvious way they can make money by lending is interest. But if you know about the process and pay attention, you will notice small, but significant fees that add to the costs of borrowing.