Definition of Net Interest Income
What does the term net interest income mean? What is the definition of the term net interest income?
"Net interest income" is how most banks make the majority of their money. Bank fees, brokerage commissions, etc are all nice pieces of change for banks, but net interest income is where the real money is at.
Net interest income is the difference between the revenues generated by a bank's assets and the expenses generated by a bank's liabilities.
For a bank, assets are loans (mortgages, car loans, etc) while liabilities consist of customer deposits.
In simple terms, banks lend out the money that you deposit. Banks will pay out interest to their depositors, and banks will receive interest from the loans that they make.
Let's say that you deposit $1,000 and receive 1% interest every year on that money. Let's say that your bank lends out this $1,000 to somebody in the form of a car loan that will make the bank 5% per year.
The difference in the two interest rates (5% annual - 1% annual) is net interest income. Banks generally make roughly 60% of their money from net interest income, but this varies depending on the bank.
Net interest income as a percentage of a bank's revenue mix has dropped over the past 10-20 years thanks to the addition of lucrative monthly banking fees, overdraft fees and brokerage commissions.
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