Comment on [deleted]
Opinionhaver@feddit.uk 1 week ago
It’s all about how certain the bank is that they’ll get their money back. Like you said, they’re very wealthy - so it may well be that their overall wealth is still greater than the amount they owe. Lending money is profitable for the bank as long as the borrower has the means to repay it, along with interest.
This is actually how many wealthy people fund their living expenses. Their wealth is usually tied up in property and investments, and rather than selling those assets, it’s often easier to borrow money at a lower interest rate than what they’re profiting from their investments.
For example, I could pay off my mortgage if I wanted to - but I won’t, because the average yearly return from stocks is around 7%, whereas the interest on my mortgage is 4.452%. The returns from my investments outweigh the cost of my debt.
golli@lemm.ee 1 week ago
Another aspect of why it is more profitable is that it allows them to avoid paying taxes on sales and already accumulated profits, which is desirable because of the compound interest effect.
I think if using something as collateral for a loan would create a taxable event and eliminate this advantage, then they would care a lot less about the arbitrage play between interest rates and average long term stock returns.