7 ms·

compound interest is where the bank say's its 3.5% interest but if you do the math you're paying 180% for a house. I don't have any idea how that became accepta

compound interest is where the bank say's its 3.5% interest but if you do the math you're paying 180% for a house. I don't have any idea how that became acceptable/the norm.

epanchin 7y ago
You need to adjust for inflation.
- majortennis 7y ago
  inflations a big scam too, stop printing bloody money
  - bildung 7y ago
    The printing of US dollars in the last decade had zero effect on inflation. https://tradingeconomics.com/united-states/inflation-cpi https://tradingeconomics.com/united-states/inflation-cpi
    - nopassrecover 7y ago
      But what about wealth distribution?
    - PeterStuer 7y ago
      That is because of how the QE was executed, pouring money directly into the financial markets with negligible impact on the real economy. In the markets where the money did end up, like the stocks and bonds markets, inflation ran rampant with NASDAQ and S&P history shows.
      - bildung 7y ago
        That isn't inflation. Inflation is about consumables. If the valuation of assets rise, that is actually the opposite: If you sell the asset, the returns can buy you more consumables. And neither S&P nor NASDAQ had anything resembling rampant gains, BTW: S&P: https://www.macrotrends.net/2526/sp-500-historical-annual-returns https://www.macrotrends.net/2526/sp-500-historical-annual-re... NASDAQ: https://www.macrotrends.net/1320/nasdaq-historical-chart https://www.macrotrends.net/1320/nasdaq-historical-chart (you have to click on the "by year" tab). In neither of these charts a person unaware of QE could identify a trend.
        PeterStuer 7y ago
        In the last ten years the NASDAQ index went from 2.000 to 8.500 and the S&P500 from 1.000 to over 3.000 in what is generally referred to as the "10 year rally". Inflation as in the rise in price of a basket of goods is generally used in reference to the consumer price index, but can also be used in reference to stocks, and baskets of those such as the indices.
        bildung 7y ago
        And before S&P went from 400 to 7000 largely uninterrupted, and NASDAQ from 350 to 7100. But as those are compounding values (i.e. there is not a linear realationship between year n and year n+1, but an exponential one) one can gain more insights from comparisons of the annual returns - that is the reason why I linked those. The annual returns are not unusual, though. Please have a look at them! If the prices of assets rise, that is appreciation. If stocks or houses appreciate, you can sell them and profit: Your purchasing power rises. If consumables experience inflation, you can not sell them for a profit: They are either immaterial, like services, or can rot, like food. This isn't pedantry, these are different concepts.
        lr4444lr 7y ago
        At the end of the day, if consumable prices are the same despite having more pieces of paper to buy them, you did not get inflation.
    - hartator 7y ago
      Or maybe real inflation is more like 7% where USD should have been deflating by 4% if left alone. QE is just taxes with an extra step.
  - AnIdiotOnTheNet 7y ago
    How do you discourage hoarding and encourage spending and investment, thus keeping your economy flowing, without inflation?
koolba 7y ago
This is a good example why one should understand compound interest. Through in a payment schedule and amortization as well. The bank is giving you $X to buy the house. You’re paying off a piece of it each month (your mortgage payment). Part of that goes to the interest on the loan, the rest goes to principal. The interest each month is based upon on the remaining principal. That means your payment starts off being mostly interest and gradually becomes mostly paying off principal. You could say, “But I can just save the full price and then buy the house with no interest!”. Sure you could. But you’re forgetting that you’re living in the house (or renting it out...) while you’re paying it off.
- majortennis 7y ago
  Just seems like a massive scam thats become the norm. You're paying off interest on the first month, as if you've already had the money for 20 years. They take liberties from day one.
  - cko 7y ago
    You do already have the money for 20 years - that’s what the lender “pays” for you on day one.
  - cthor 7y ago
    Just as well, you get to start acting like you own the house from day 1.
    - greyhair 7y ago
      That is wonderful phrasing on the idea. Thank you.
  - ubercow13 7y ago
    Why should there be no charge for borrrowing the money for 20 years? That doesn’t make sense, you have had the money for 1 month when you make the first payment, and so you are charged for it.
  - imtringued 7y ago
PeterStuer 7y ago
I have many reservations and am very critical of the financial system. But the concept of interest on loans is not a "scam'. The interest in it's simplest form is just a value appreciation of the time value of money [1]. Would you rather have $100 today, or $100 next month? How about $100 today vs $102 next month? Still rather in the today camp? How about $105 next month? That is the interest. It is the value derivative of having the money 'now' vs having the money 'later'. Where things can get scammy is in the complex type of credit products on offer (tying in all sorts of opaque references to things presented as neutral which are far from), and how things are communicated to the borrower. Tip: If you are considering a loan, always ask for a full repayment plan showing you which payments are due each month, and the resulting reduction in the amount due (your payment first covers the interest accrued in that month, and only after that covers principal reduction). If there are variables in the loans formula, ask for simulations that cover the most likely evolution scenario, as well as the extremes. Every financial institution has such a payment plan calculator. Long ago I have written one which afaik is still in use today in a non-trivial financial services company. [1] https://www.investopedia.com/terms/t/timevalueofmoney.asp https://www.investopedia.com/terms/t/timevalueofmoney.asp
- javajosh 7y ago
  Good comment. I sometimes describe borrowing as renting money, where interest is the rent. Its a mathematically interesting construct because, for one thing, the value of the thing you rented goes down with cumulative rent paid. It's kind of a degenerate money cycle if you loan money to someone who uses it to pay you interest on the loan. I suppose only taxes (serving as friction, removing energy) prevent this from being a kind of economic perpetual motion machine! I'd be stunned if this trick wasn't a) very old, and b) have about 1000 modern variations.
- majortennis 7y ago
  I didn't say interest on a loan was a scam I think compound interest on mortgages is. A fixed price interest would make sense like you borrow £100 , you pay back £110. 10% interest. But my understanding on a compound interest mortgage is the bank says something like 2% interest. and they take the £100 and x by 1.02 and just spam ='s on the calculator until the actual interest percentage is like 180%. You shouldn't have to spend an hour learning how the bank are gnna screw you.
throwaway744678 7y ago
Depending on your country, the law may require the bank to actually print the total cost of the loan on the contract as well. You'd have a better argument with revolving credits, the rates of which are generally much more predatory.
6gvONxR4sf7o 7y ago
If you lend me $X at 3.5%/yr for 30 years and I can earn 7%/yr elsewhere, like by investing in a S&P index tracker. Say there's no minimum payment on your loan, just to keep the math easy. In 30 years, I'm going to owe you 2.8 * X (via 1.035^30). My investment of that $X loan has grown into 7.6 * X (via 1.07^30). After tax, call it 6.5 * X. After I pay you off, I've earned about 3.7 * X. If the initial loan was $400k on a $500k house, then yeah it sucks that I've payed you $1.1M, a clear overpayment, but I wont be sad because I'm coming out ahead by about $1.5M. In reality, loans come with minimum payments, so you can't come out quite so far ahead. What this all means is if you can do something better with your money, (e.g. market tracker at 7% on a 3.5% loan), then just pay the minimum and do that better thing with the rest. If you can't (e.g. market tracker at 7% on an 8% loan), then pay it down as fast as you can, or don't take it in the first place unless there are other factors.

compound interest is where the bank say's its 3.5% interest but if you do the math you're paying 180% for a house. I don't have any idea how that became acceptable/the norm.

epanchin 7y ago

You need to adjust for inflation.

majortennis 7y ago
inflations a big scam too, stop printing bloody money
- bildung 7y ago
  The printing of US dollars in the last decade had zero effect on inflation. https://tradingeconomics.com/united-states/inflation-cpi https://tradingeconomics.com/united-states/inflation-cpi
  - nopassrecover 7y ago
    But what about wealth distribution?
  - PeterStuer 7y ago
    That is because of how the QE was executed, pouring money directly into the financial markets with negligible impact on the real economy. In the markets where the money did end up, like the stocks and bonds markets, inflation ran rampant with NASDAQ and S&P history shows.
    - bildung 7y ago
      That isn't inflation. Inflation is about consumables. If the valuation of assets rise, that is actually the opposite: If you sell the asset, the returns can buy you more consumables. And neither S&P nor NASDAQ had anything resembling rampant gains, BTW: S&P: https://www.macrotrends.net/2526/sp-500-historical-annual-returns https://www.macrotrends.net/2526/sp-500-historical-annual-re... NASDAQ: https://www.macrotrends.net/1320/nasdaq-historical-chart https://www.macrotrends.net/1320/nasdaq-historical-chart (you have to click on the "by year" tab). In neither of these charts a person unaware of QE could identify a trend.
      - PeterStuer 7y ago
        In the last ten years the NASDAQ index went from 2.000 to 8.500 and the S&P500 from 1.000 to over 3.000 in what is generally referred to as the "10 year rally". Inflation as in the rise in price of a basket of goods is generally used in reference to the consumer price index, but can also be used in reference to stocks, and baskets of those such as the indices.
        bildung 7y ago
        And before S&P went from 400 to 7000 largely uninterrupted, and NASDAQ from 350 to 7100. But as those are compounding values (i.e. there is not a linear realationship between year n and year n+1, but an exponential one) one can gain more insights from comparisons of the annual returns - that is the reason why I linked those. The annual returns are not unusual, though. Please have a look at them! If the prices of assets rise, that is appreciation. If stocks or houses appreciate, you can sell them and profit: Your purchasing power rises. If consumables experience inflation, you can not sell them for a profit: They are either immaterial, like services, or can rot, like food. This isn't pedantry, these are different concepts.
        lr4444lr 7y ago
        At the end of the day, if consumable prices are the same despite having more pieces of paper to buy them, you did not get inflation.
  - hartator 7y ago
    Or maybe real inflation is more like 7% where USD should have been deflating by 4% if left alone. QE is just taxes with an extra step.
- AnIdiotOnTheNet 7y ago
  How do you discourage hoarding and encourage spending and investment, thus keeping your economy flowing, without inflation?

koolba 7y ago

This is a good example why one should understand compound interest. Through in a payment schedule and amortization as well. The bank is giving you $X to buy the house. You’re paying off a piece of it each month (your mortgage payment). Part of that goes to the interest on the loan, the rest goes to principal. The interest each month is based upon on the remaining principal. That means your payment starts off being mostly interest and gradually becomes mostly paying off principal. You could say, “But I can just save the full price and then buy the house with no interest!”. Sure you could. But you’re forgetting that you’re living in the house (or renting it out...) while you’re paying it off.

majortennis 7y ago
Just seems like a massive scam thats become the norm. You're paying off interest on the first month, as if you've already had the money for 20 years. They take liberties from day one.
- cko 7y ago
  You do already have the money for 20 years - that’s what the lender “pays” for you on day one.
- cthor 7y ago
  Just as well, you get to start acting like you own the house from day 1.
  - greyhair 7y ago
    That is wonderful phrasing on the idea. Thank you.
- ubercow13 7y ago
  Why should there be no charge for borrrowing the money for 20 years? That doesn’t make sense, you have had the money for 1 month when you make the first payment, and so you are charged for it.
- imtringued 7y ago

PeterStuer 7y ago

I have many reservations and am very critical of the financial system. But the concept of interest on loans is not a "scam'. The interest in it's simplest form is just a value appreciation of the time value of money [1]. Would you rather have $100 today, or $100 next month? How about $100 today vs $102 next month? Still rather in the today camp? How about $105 next month? That is the interest. It is the value derivative of having the money 'now' vs having the money 'later'. Where things can get scammy is in the complex type of credit products on offer (tying in all sorts of opaque references to things presented as neutral which are far from), and how things are communicated to the borrower. Tip: If you are considering a loan, always ask for a full repayment plan showing you which payments are due each month, and the resulting reduction in the amount due (your payment first covers the interest accrued in that month, and only after that covers principal reduction). If there are variables in the loans formula, ask for simulations that cover the most likely evolution scenario, as well as the extremes. Every financial institution has such a payment plan calculator. Long ago I have written one which afaik is still in use today in a non-trivial financial services company. [1] https://www.investopedia.com/terms/t/timevalueofmoney.asp https://www.investopedia.com/terms/t/timevalueofmoney.asp

javajosh 7y ago
Good comment. I sometimes describe borrowing as renting money, where interest is the rent. Its a mathematically interesting construct because, for one thing, the value of the thing you rented goes down with cumulative rent paid. It's kind of a degenerate money cycle if you loan money to someone who uses it to pay you interest on the loan. I suppose only taxes (serving as friction, removing energy) prevent this from being a kind of economic perpetual motion machine! I'd be stunned if this trick wasn't a) very old, and b) have about 1000 modern variations.
majortennis 7y ago
I didn't say interest on a loan was a scam I think compound interest on mortgages is. A fixed price interest would make sense like you borrow £100 , you pay back £110. 10% interest. But my understanding on a compound interest mortgage is the bank says something like 2% interest. and they take the £100 and x by 1.02 and just spam ='s on the calculator until the actual interest percentage is like 180%. You shouldn't have to spend an hour learning how the bank are gnna screw you.

throwaway744678 7y ago

Depending on your country, the law may require the bank to actually print the total cost of the loan on the contract as well. You'd have a better argument with revolving credits, the rates of which are generally much more predatory.

6gvONxR4sf7o 7y ago

If you lend me $X at 3.5%/yr for 30 years and I can earn 7%/yr elsewhere, like by investing in a S&P index tracker. Say there's no minimum payment on your loan, just to keep the math easy. In 30 years, I'm going to owe you 2.8 * X (via 1.035^30). My investment of that $X loan has grown into 7.6 * X (via 1.07^30). After tax, call it 6.5 * X. After I pay you off, I've earned about 3.7 * X. If the initial loan was $400k on a $500k house, then yeah it sucks that I've payed you $1.1M, a clear overpayment, but I wont be sad because I'm coming out ahead by about $1.5M. In reality, loans come with minimum payments, so you can't come out quite so far ahead. What this all means is if you can do something better with your money, (e.g. market tracker at 7% on a 3.5% loan), then just pay the minimum and do that better thing with the rest. If you can't (e.g. market tracker at 7% on an 8% loan), then pay it down as fast as you can, or don't take it in the first place unless there are other factors.