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If you take out a car loan or mortgage, the bank (or credit union (or government)) expects to make money off your interest for the next 5 to 30 years. If you p

by seiji 11y ago

If you take out a car loan or mortgage, the bank (or credit union (or government)) expects to make money off your interest for the next 5 to 30 years. If you pay off your loan/mortgage early then the bank won't get all the future interest it expected to make — the bank only made [START, PAYOFF] interest instead of [START, FULL-TERM] interest. Some loans even have "pre-payment penalties" to favor the bank over the consumer in such cases.

lutorm 11y ago
Sure, but they now have the money back and can lend it again, which may even work to their advantage if interest rates have risen since the loan was signed. It seems impossible to me to say that the net effect is a sure loss. And that's entirely beside the point that "not making as much money as I had hoped" is not the same thing as "lost money".
- seiji 11y ago
  "not making as much money as I had hoped" is not the same thing as "lost money". It depends on how you account for it. Technically you shouldn't assume all your future interest is materialized (IANAA), but if you run forecasts and see you have a million people who owe you a billion dollars total on a 7% interest rate over the next 20 years, you expect to have, within reason, that money. If something incredible happens and all those people suddenly pay off their loans this month, that drastically changes your future (especially if your loans were at a higher interest rate from the past you can't re-charge today).
  - cmdrfred 11y ago
    But you are still a billionaire so I won't be shedding any tears for you.
mcv 11y ago
It seems to me that if early repayment of a loan is disadvantageous enough to require a penalty, the interest on the loan was unreasonably high to begin with. Out of proportion with the risk the bank is running, and out of proportion with the ROI they could normally get out of that money. Maybe we should take pre-payment penalties as a sign to negotiate a lower interest rate.

by seiji 11y ago

lutorm 11y ago

Sure, but they now have the money back and can lend it again, which may even work to their advantage if interest rates have risen since the loan was signed. It seems impossible to me to say that the net effect is a sure loss. And that's entirely beside the point that "not making as much money as I had hoped" is not the same thing as "lost money".

seiji 11y ago
"not making as much money as I had hoped" is not the same thing as "lost money". It depends on how you account for it. Technically you shouldn't assume all your future interest is materialized (IANAA), but if you run forecasts and see you have a million people who owe you a billion dollars total on a 7% interest rate over the next 20 years, you expect to have, within reason, that money. If something incredible happens and all those people suddenly pay off their loans this month, that drastically changes your future (especially if your loans were at a higher interest rate from the past you can't re-charge today).
- cmdrfred 11y ago
  But you are still a billionaire so I won't be shedding any tears for you.

mcv 11y ago

It seems to me that if early repayment of a loan is disadvantageous enough to require a penalty, the interest on the loan was unreasonably high to begin with. Out of proportion with the risk the bank is running, and out of proportion with the ROI they could normally get out of that money. Maybe we should take pre-payment penalties as a sign to negotiate a lower interest rate.