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Would capping interest benefit the economy?

Fisher

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Would capping interest on personal loans and credit at 10% benefit the economy?
No, because you assume that people who pay more will get those rates apparently, or at least that is what I infer from you asking in the first place. It means that people above that rate now would get no credit and people below it would have to pay more to offset the lost revenue. Consumer Credit is a huge part of the economic activity of the US.
 

Captain Adverse

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No, because you assume that people who pay more will get those rates apparently, or at least that is what I infer from you asking in the first place. It means that people above that rate now would get no credit and people below it would have to pay more to offset the lost revenue. Consumer Credit is a huge part of the economic activity of the US.
Sorry, could you parse that for me please?

I was under the impression the OP was asking if limiting the amount of interest charged on either a personal loan or credit (including credit cards) at 10% would benefit the economy. Probably under the assumption that having to pay back less interest would allow repayment of loans and debts sooner, thus leading to more spending via credit card and quicker returns on loan amounts.

I don't understand the "people who pay more would get the rates" but "people who already have high rates would get no credit" etc., etc.

IMO personal deficit spending (i.e. use of credit cards) is a major problem as people have come to depend on this to stretch their buying power beyond their earning power only to find themselves in perpetual debt.

The profit comes from those large interest rates; because you are basically paying the lender his profits before you pay off your actual debt. The higher the rates the less of the actual purchase price you pay back (unless you pay it all off each month); leftover amounts get interest capitalized further increasing lender profit and extending the period it takes to pay off the base debt.

It kinda reminds me of the old "company store" used by sharecroppers, miners, and other labor back in the bad old days. They would buy on credit from the company store pledging future wages or crops and always seem to come up short and owing more and more until they were basically working for the boss for free. Of course in this case there is no "boss," but the perpetual debt remains and can result in judgements, wage garnishments, and other collections. Even bankruptcy.

I'm all for profit, but some of these rates seem a bit high and I think a 10% profit on any loan is both reasonable and a greater stimulus to the economy. Why? Lower interest allows borrows to pay back more of the actual purchase debt leaving them more buying power which allows them to purchase more products. That stimulates production and the cycle continues. Meanwhile, the lender is getting a fair profit.
 

Painter

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No, because you assume that people who pay more will get those rates apparently, or at least that is what I infer from you asking in the first place. It means that people above that rate now would get no credit and people below it would have to pay more to offset the lost revenue. Consumer Credit is a huge part of the economic activity of the US.
I agree that 10% would be too low for a cap.
But I disagree with the main point of your post. There is another angle...
If interest rates were lower, it would significantly increase spending.
I'll give you a personal example.
I recently got an offer for a pre approved Home Depot card with a $4,000.00 limit.
I decided to accept and got the card, only to realize that my interest rate is in the mid 20's.
I'll never use the card. I will keep the account open because there is no annual fee and the 4,000 dollar open credit line will boost my credit rating.
But I have absolutely no desire to pay 20 something percent interest on a credit card. Instead, I'll use a Visa or Master Card with a much lower rate.

But if they had sent me a card with a reasonable interest rate, I can think of lots of things I might want from home depot that I might be willing to pay reasonable interest for.

10% is too low for a cap.
But a cap in general could be a really good idea. I would simply start out by stopping the loan shark type rates and capping it at 21 or so.

*Disclaimer - I am not a banker, an accountant, or an economist. It is very possible that I missed a big point and I know that I could be wrong.
 

Fisher

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Sorry, could you parse that for me please?

I was under the impression the OP was asking if limiting the amount of interest charged on either a personal loan or credit (including credit cards) at 10% would benefit the economy. Probably under the assumption that having to pay back less interest would allow repayment of loans and debts sooner, thus leading to more spending via credit card and quicker returns on loan amounts.

I don't understand the "people who pay more would get the rates" but "people who already have high rates would get no credit" etc., etc.

IMO personal deficit spending (i.e. use of credit cards) is a major problem as people have come to depend on this to stretch their buying power beyond their earning power only to find themselves in perpetual debt.

The profit comes from those large interest rates; because you are basically paying the lender his profits before you pay off your actual debt. The higher the rates the less of the actual purchase price you pay back (unless you pay it all off each month); leftover amounts get interest capitalized further increasing lender profit and extending the period it takes to pay off the base debt.

It kinda reminds me of the old "company store" used by sharecroppers, miners, and other labor back in the bad old days. They would buy on credit from the company store pledging future wages or crops and always seem to come up short and owing more and more until they were basically working for the boss for free. Of course in this case there is no "boss," but the perpetual debt remains and can result in judgements, wage garnishments, and other collections. Even bankruptcy.

I'm all for profit, but some of these rates seem a bit high and I think a 10% profit on any loan is both reasonable and a greater stimulus to the economy. Why? Lower interest allows borrows to pay back more of the actual purchase debt leaving them more buying power which allows them to purchase more products. That stimulates production and the cycle continues. Meanwhile, the lender is getting a fair profit.

Because if you pay more than 10% now it is because you are considered a credit risk or just have not shopped around. If you cannot get below 10% now, then nobody is likely to loan you money at 10% so you can deal with unexpected things like a mechanical repair, a new fridge, or just splurge stupidly. The less people buy, the worse it is for the economy because it removes volume. Likewise, if my credit card company cannot charge one person 14%, then they are going to raise the rate on my card from 6% to 8 or 9% to offset the lost revenue from not loaning people money at 14% which means I will have less to spend on new goods and services as well. The OP is not asking about what is good for individuals, but for the economy.

Now what I would support would be banning the retroactive interest that people get hit with on those "one year same as cash/no interest for the first year deals" where people are not told that in the fine print there is a provision that if you do not pay it completely off in that period, you get all that interest you would have been paying added back onto your balance.
 

Fisher

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I agree that 10% would be too low for a cap.
But I disagree with the main point of your post. There is another angle...
If interest rates were lower, it would significantly increase spending.
I'll give you a personal example.
I recently got an offer for a pre approved Home Depot card with a $4,000.00 limit.
I decided to accept and got the card, only to realize that my interest rate is in the mid 20's.
I'll never use the card. I will keep the account open because there is no annual fee and the 4,000 dollar open credit line will boost my credit rating.
But I have absolutely no desire to pay 20 something percent interest on a credit card. Instead, I'll use a Visa or Master Card with a much lower rate.

But if they had sent me a card with a reasonable interest rate, I can think of lots of things I might want from home depot that I might be willing to pay reasonable interest for.

10% is too low for a cap.
But a cap in general could be a really good idea. I would simply start out by stopping the loan shark type rates and capping it at 21 or so.

*Disclaimer - I am not a banker, an accountant, or an economist. It is very possible that I missed a big point and I know that I could be wrong.

First, they will likely close your account at some point if you do not use it. As for the rest, it just depends. If a finance company can make a profit, they will lend at a high rate to high risk people because they can make dollars on the collections end by suing enough people to make it worth it. If they cannot make money on the collections side, they are not going to lend to people likely to go to collections.
 

Painter

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First, they will likely close your account at some point if you do not use it. As for the rest, it just depends. If a finance company can make a profit, they will lend at a high rate to high risk people because they can make dollars on the collections end by suing enough people to make it worth it. If they cannot make money on the collections side, they are not going to lend to people likely to go to collections.
How do you define high risk though?
Seems like people with excellent credit are still getting rates in the 20's on cards.
I think you have really good points. But I also think there is another side to it in that many responsible consumers that pay their bills on time and have good credit would actually choose to use that credit if it had half way decent interest rates.
 

DVSentinel

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Absolutely not.

Might help in the very short term, but it is a terrible terrible idea for the longterm health of our economy. Interest rates on consumer credit, credit cards or pretty much any non-capital purchases should be made higher and higher until we quit basing our economy on credit instead of real income.
 

radcen

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How do you define high risk though?
Seems like people with excellent credit are still getting rates in the 20's on cards.
I think you have really good points. But I also think there is another side to it in that many responsible consumers that pay their bills on time and have good credit would actually choose to use that credit if it had half way decent interest rates.
Some people are very conscientious in paying their bills, but not enough to pay attention to the rates they pay.

Also, I know several people... not me, unfortunately... who don't care one whit regarding the rate because they pay it off every month. To them, the rate is irrelevant. They're more concerned with other factors such as rewards, etc.
 
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