As one of the oldest industries in the world, the banking industry dates back to around 2000 BC. Most accounts report the first banks involving merchants offering grain loans to traders and farmers while moving goods between cities.
Since this humble beginning, the banking industry has evolved and transformed the way the world operates. Today, the banking industry is technology-driven, globalized, and highly complex — pretty far removed from its simple barter system beginnings.
Let’s explore some of the most common bank products offered by these fundamental institutions.
4 Types of Deposit Accounts
Deposit accounts are one of the most common types of bank products. As the name suggests, a deposit account is a bank product where you can deposit as well as withdraw money.
All deposit account transactions are recorded in the books of the bank, which means your account balance is reported as a liability by the bank, signifying you are owed money.
While some banks and accounts pay interest on balances in deposit accounts, other institutions may charge fees for transactions.
Most deposit accounts are covered by the Federal Deposit Insurance Corporation (FDIC). The FDIC insures deposits of up to $250,000 per insured bank, per depositor, for each account ownership category. This insurance could be paramount in the event of a bank failure.
Some of the most common types of deposit accounts are explained below.
The Checking Account
As the staple offering of any bank, the checking account is arguably the most common type of transaction and deposit account. Without any withdrawal limits, the checking account is often used as the go-to, daily transaction bank account.
In fact, the checking account is often recognized as a spending account. Because of its versatility, many people have more than one checking account and open these accounts based on needs and/or goals.
For example, a married couple could have a joint checking account for household bills as well as individual checking accounts for each spouse.
Due to the versatility of the checking account, there are a number of different types:
- Traditional checking account
- Interest-bearing checking account
- Business checking account
- Senior checking account
- Student checking account
- Rewards checking account
- And more
How to Access Funds in a Checking Account?
One of the calling cards for a checking account is the ease of access to your funds. With a checking account, you can access your funds in a number of ways:
- Check writing
- Debit card
- ATM withdrawals
- In-person with a teller
- Online transfers
The Savings Account
While a checking account is designed to be a transactional, spending account, the savings account is where you can store and stash money that you aren’t ready to use yet.
Similar to a checking account, many people open multiple goal-based savings accounts.
For example, some households have an:
- Emergency savings account
- Vacation savings account
- Vehicle savings account
Because of the high level of liquidity, savings accounts are considered to be short-term savings vehicles. In other words, if you intend on accessing the money within a relatively short period of time, stashing it in a savings account could be a viable and safe option.
Most people link their checking and savings accounts to simplify transfers between the two.
Another popular use of savings accounts is overdraft protection. With overdraft protection, anytime you attempt to withdraw more money than what’s available in your checking, it will automatically pull money from the connected savings account. This can help prevent you from being billed overdraft charges and returned item charges, which can quickly add up.
To help you grow your savings, most savings accounts will pay you interest on your deposits. While some checking accounts are interest-bearing, most — if not all — savings accounts will offer interest.
However, the interest you earn in a savings account does have tradeoffs in the form of restrictions on your money. For example, most savings accounts will have a set number of withdrawals you are allowed to make in a period. If you exceed this number of withdrawals, you may be charged a penalty, or the account will have to be converted to a checking account.
While many savings accounts are free, some may require you to carry a minimum balance to avoid the monthly maintenance fee.
Money Market Deposit Account
Offering you the best of a savings and checking account, a Money Market Account (MMA) is a low transaction account that typically pays a higher interest rate.
Financial institutions are able to offer a higher interest rate because they are permitted to invest in vehicles that savings accounts cannot, such as:
- Government securities
- Certificates of Deposit
- Commercial paper
In exchange for the higher interest rate, MMAs generally have higher minimum balance requirements.
With an MMA account, you may have check-writing abilities and debit card privileges— like a checking account — but may not be allowed to have an unlimited number of withdrawals.
Certificates of Deposit
If you’re looking for a higher rate of deposit than what’s traditionally offered on traditional savings accounts and you don’t mind locking your money up for a period of time, a Certificate of Deposit (CD) may be your best solution.
With a CD, you will earn interest on your deposit in exchange for leaving the proceeds untouched for a specific period of time, which is known as the term. Common CD terms are:
- Three months
- Six months,
- One year,
- 18 months
- Two years
- Three years, and more
In general, the longer the term and the higher your deposit, the greater the interest you can earn. While CDs work well for many people, it’s important to understand that if you withdraw your funds prior to the maturity date of the CD, you will incur a penalty. And it’s also important to understand that different CD products may require different initial deposits and different term lengths.
6 Types of Mortgage & Personal Lending Products
While deposit accounts are all about you saving (and essentially lending the bank money), lending products work in the opposite way — the bank lends you money.
Many of the loans the bank issues are funded by monies that are on deposit. That’s how banks can afford to pay you interest on savings accounts, CDs, certain checking accounts, and money markets.
In general, there are two broad categories of lending products: secured and unsecured products.
Secured lending products are those like mortgages, auto loans, and similar products that are secured by a real, secure asset. These lending products will usually have a lower interest rate compared to unsecured lending products, such as personal loans and credit cards, that have no real assets anchoring the loan.
Let’s look at some of the most common lending products offered by banks.
Mortgage
A mortgage is a loan from a financial institution or bank designed for the purchase of a home, land, or other types of real estate.
With a mortgage, the collateral on the loan is the property itself. This means if you fail to make the monthly payments as agreed upon, the lender can sell the property to recoup its money.
Considered long-term debt, a mortgage is usually taken out over periods like 15 years, 20 years, or 30 years. During this time, you will make monthly payments based on an agreed-upon schedule.
By the time you have made your last mortgage payment, you will have paid the full amount borrowed as well as any interest charged on the loan.
In general, the shorter the term of your mortgage, the lower the interest rate and the lower amount you will pay over the life of the loan.
While longer terms can lead to lower monthly payments, these loans usually have higher interest rates and will almost certainly require you to pay more over the life of the loan.
It’s important to understand that you do not technically own your property until the mortgage has been fully paid and satisfied.
Types of Mortgages
There are a number of different types of mortgages available to borrowers. Some of the most popular types of mortgages offered by banks include:
- Fixed-rate mortgages have a fixed term and a fixed interest rate.
- Adjustable-rate mortgages (ARM) have a variable interest rate that can go up or down based on market factors.
- Balloon mortgages have payments that start low and gradually increase until a lump sum before the loan matures. This type of mortgage is often used by those who expect higher income or cash flow toward the end of the loan.
- A Federal Housing Administration (FHA) loan is a mortgage backed by the government. As a popular first-time homebuyer’s opinion, FHA loans usually have lower credit score requirements and may have lower down payments.
- VA loans are guaranteed by the U.S. Department of Veterans Affairs. These loans are offered to service members, veterans, and eligible military spouses, and VA loans require little to no down payment.
- The United States Department of Agriculture (USDA) loan is secured by the U.S. Department of Agriculture and is offered in certain rural communities to borrowers with low to moderate incomes. These loans also may have lower interest rates, no down payment requirements, and no set max purchase price.
- Jumbo mortgages are designed for much more expensive properties that exceed the limits set by the Federal Housing Finance Agency.
Home Equity Loans
Once you have a mortgage and make payments over a period of time, you will gain what is called equity. Home equity refers to how much of the value of your home you control compared to how much is controlled by the lender of your mortgage.
For example, if your home is valued at $500,000 and you only owe $100,000, you would essentially have $400,000 in equity.
A home equity loan would allow you to borrow against the $400,000 in equity you have in your home. Once you take out a home equity loan, the proceeds are paid to you in a lump sum. You would then pay the principal back plus any interest accrued over the life of the loan.
Home equity loans are also called home equity installment loans or second mortgages. And most home equity loans are fixed rates.
Home Equity Lines of Credit
A home equity line of credit (HELOC) is very similar to a home equity loan. In fact, it operates on the identical principle of borrowing against the equity you have earned or gained in your home.
The difference is that with a HELOC, you have a line of credit vs a one-time lump sum distribution. With a HELOC, you will have a set amount of cash ($400,000 based on the previous example) that you can use and repay over a period of time.
It works very similarly to a credit card, but HELOCs have substantially lower interest rates on outstanding balances.
The lower rates on mortgages, home equity loans, and HELOCs are all due to the lower risk assumed by the lender. However, if you default on a HELOC or a home equity loan, it can cause your home to be foreclosed.
Automotive Loans
As you would probably assume, an automotive loan is a loan issued by a bank for you to purchase a vehicle, such as:
- New or used car, truck, or SUV
- Motorcycle
- RV
- Four-wheelers
- Boat
- Tractor
- And virtually anything else with four wheels or less.
Similar to the way a mortgage is secured by the property, an automotive loan is secured by the vehicle. However, auto loans have significantly shorter terms when compared to a mortgage.
Popular auto loans can range from 36-month terms up to 72 or 84-month terms.
The length of your term will be based on a number of factors, such as:
- Age of the vehicle
- Type of vehicle
- Number of miles on the vehicle
- Your financial profile
- And more.
One general rule of thumb is that longer terms may have lower monthly payments and higher interest rates. On the other hand, shorter terms have higher monthly payments and lower interest rates.
However, longer-term auto loans will cost you more in the long run due to the higher interest rate over an extended period of time.
Personal Loans Are Unsecured Products
Until now, every lending product we have discussed has been secured or tethered to real property. Mortgages, auto loans, and other types of secured loans are often less expensive because the lender takes on less risk due to the presence of a physical asset.
In the event you default on your loan, a lender is much more likely to recover their money by selling the property.
In contrast, an unsecured loan doesn’t have a real asset associated with it. Because of this, unsecured products, such as personal loans, will typically have higher interest rates.
A personal loan is a type of unsecured loan that is based on your credit and financial profile. Personal loans are often used for making big purchases or to consolidate higher-interest-rate credit cards.
While personal loans are more expensive than mortgages, they can be significantly less expensive than credit cards. As such, many people consolidate several credit card debts into one, lower-cost monthly payment of a personal loan.
Credit Cards
As one of the most popular methods of payment, credit cards offer you a line of credit that you can use to transfer balances, make purchases, or receive cash advances.
With a credit card, you will be granted a limit based on your credit score and financial profile. This line of credit is open with no expiration date or maturity date.
As long as you are making payments on time, you can use your credit card up to the limit, pay the balance down, and continue using it — it’s a revolving line of credit.
It’s important to understand that credit cards will charge a higher annual percentage rate (APR) when compared to other types of consumer lending products. The interest charges on any unpaid balance will usually be imposed one month after you have made the purchase — unless you qualify for a 0% APR introductory offer for an initial period.
When used properly and responsibly, credit cards can be a powerful way to build credit and have access to a line of credit on demand. The trick with credit cards is to pay the full balance every month to avoid being charged interest.
Types of Credit Cards
There are two major categories of credit cards:
- Unsecured credit cards are cards issued by lenders based solely on your credit score and financial profile. Unsecured cards may have limits that exceed $20,000.
- Secured credit cards, on the other hand, are designed more so for those with no credit, thin credit, or who are in the credit rebuilding phase. Secured credit cards tend to have a lower limit, but they can be a dynamic tool for building positive credit references and scores.
8 Types of Additional Banking Products & Financial Instruments
In addition to the previously mentioned categories of deposit accounts and consumer lending products, the bank may offer several other products.
Debit Cards
Debit cards look identical to credit cards. However, debit cards are linked directly to your checking account, savings account, or money market account.
Debit cards allow you to make point-of-sale purchases and ATM withdrawals that are deducted from your bank balance.
Many banks offer either Visa debit cards or Mastercard debit cards that are accepted at most retailers.
ATM Cards
ATM cards look similar to debit and credit cards. However, ATM cards will not wear the Visa or Mastercard logo.
ATM cards are designed to be used solely at ATMs — not point-of-sale purchases.
Many banks will issue ATM cards instead of debit cards for savings-account-only access or to consumers who may have previously had checking accounts closed due to overdrafts or write-offs.
Cashiers Checks
If you are making a large purchase, the seller may not accept a personal check from you. Instead, the seller may require a cashier’s check or bank check.
While a personal check is drawn from your personal account, a cashier’s check is drawn from the bank’s own funds — not yours.
In theory, cashier’s checks are more credible than personal checks because these financial instruments are backed by an institution vs a person.
Money Orders
Money orders are similar to cashier’s checks in that they are not drawn off your individual account. Instead, the money order is insured by the bank or another commercial institution.
Here are the key differences between a cashier’s check and money order:
- Cashier’s checks are generally available in higher dollar amounts than a money order.
- Money orders have lower fees than cashier’s checks.
- Cashier’s checks are considered to b more secure than money orders.
Traveler’s Checks or Traveler’s Cheques
A traveler’s check is a prepaid financial instrument that operates like cash.
As the name suggests, traveler’s checks are often used by travelers to purchase services or goods when traveling, especially in other countries.
Wire Transfers
A wire transfer is a digital or electronic way to move funds via banks and transfer agencies throughout the world.
Wire transfers can be easily sent via non-bank institutions, such as Western Union, or between banks.
Banks Offer Currency Exchange Services
If you’re traveling to a different country and want to travel with the currency of that country, you will need foreign currency exchange services.
Currency is exchanged based on what it costs to purchase the currency of one country using the currency of another.
However, it’s important to understand that not all banks and financial institutions offer currency exchange services. And many of the financial institutions that do offer this service will charge a fee for exchanging currency.
Safe Deposit Boxes
A safe deposit box or safety deposit box is an individually secured container that is typically made of metal. It’s used to store valuables at a credit union or bank. You can store virtually anything in a safe deposit box, such as jewelry, important documents, and even cash.
However, you should consider the use of safety deposit boxes carefully, especially when it comes to storing cash. Because the safety deposit box isn’t a deposit account, it will not be insured by the FDIC deposit insurance if the contents are stolen or damaged.
In addition, most financial institutions do not insure the contents of a safe deposit box.
