How does getting paid interest to borrow work?

[Kwatt]

http://www.nytimes.com/2015/02/28/b...ugh-the-looking-glass.html?smid=tw-share&_r=1

If someone would explain this I would be grateful.
Take out a loan and the banks pays you interest.
Make a deposit and the bank charges interest.
If I default on the loan will I get paid a higher interest? Plus penalties?

I would like to borrow a few million and I promise I'll never pay it back. I will stand in line to get some of that...


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[Carson Dyle]

Sounds like it's being subsidized by governments to spur economic growth. That's one way of doing it. Probably has a lot of advantages over things like issuing grants.

Doesn't have to go below zero. If you have money in a US bank right now and you're "earning" something stupid like 0.10% interest, then you're essentially being charged by the bank to keep your money.

 

[Belegost]

I had to double check I wasn't reading the Onion or something similar.

Interesting times.

 

[SparkyJJO]

So they'll penalize you for saving money for your future (whether short or long term).

Brilliant.

 

[Imp]

Negative interest rates because of deflation?

Ya, that one blows my mind. All I know is to not keep money in any interest bearing account if/when that happens. Otherwise, I will break shit if they "give" me my negative interest.

 

[Bock]

It's to combat money hoarding. Money not being used for investments, capital, etc etc hurts the economy. In theory, the economy would be better off if that hoarded money didn't exist.

 

[Lonyo]

On a country basis it works because of currencies. A government sets its own central rate below 0 because people will still buy partially to invest in the currency.

Denmark is special because it has its own currency, but that currency is tightly pegged to the Euro. It can offer sub-zero interest rates on the assumption that they will increase in value relative to the Euro because Denmark will eventually be forced to either loosen the peg, or depeg entirely, so your gains are not through interest, but through currency "speculation".
In other countries like Sweden and Switzerland the situation is the same. The countries are linked to the Euro economy but have their own currencies and need to remain competitive with a falling Euro, so part of the bond investments are currency speculation as well.

For Euro countries it really is weird though.

Switzerland had super low interest rates for mortages, and lots of non-Swiss people, specifically in Poland, took out loans in Swiss Francs because of the low rates, when the Franc was pegged to the Euro. Then Switzerland broke the peg and people got rather messed over because suddenly their loans were for a lot more (in Euros) and they lost out big.

 

[Kwatt]

So they'll penalize you for saving money for your future (whether short or long term).
Brilliant.

Like the current 0.10% in the US. That 0.10% has really cut into my spending. In order for my savings to grow. I have to set aside an extra 1.9%+ of my balance to gain 2% a year on my Credit Union account. That is on top of the 5% of gross income...

It's to combat money hoarding. Money not being used for investments, capital, etc etc hurts the economy. In theory, the economy would be better off if that hoarded money didn't exist.

Isn't that another way to say "to combat saving"?

Kinda makes me want to save more. If I could. Just to show them I can.

On a country basis it works because of currencies. A government sets its own central rate below 0 because people will still buy partially to invest in the currency.

Denmark is special because it has its own currency, but that currency is tightly pegged to the Euro. It can offer sub-zero interest rates on the assumption that they will increase in value relative to the Euro because Denmark will eventually be forced to either loosen the peg, or depeg entirely, so your gains are not through interest, but through currency "speculation".
In other countries like Sweden and Switzerland the situation is the same. The countries are linked to the Euro economy but have their own currencies and need to remain competitive with a falling Euro, so part of the bond investments are currency speculation as well.

For Euro countries it really is weird though.

Switzerland had super low interest rates for mortages, and lots of non-Swiss people, specifically in Poland, took out loans in Swiss Francs because of the low rates, when the Franc was pegged to the Euro. Then Switzerland broke the peg and people got rather messed over because suddenly their loans were for a lot more (in Euros) and they lost out big.

Seems like the thing for people in that position to do is to save Euro's.


Thanks for the info everyone. Now I understand even though I don't understand it.


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