NationStates Jolt Archive

Many people have had severe financial problems caused primarily from variable interest rates. You borrow an amount at a rate you can pay, and for whatever reason (maybe you were late on a payment, maybe your credit score dropped) they change the interest rate, meaning that you now owe more than you expected when you initially took the loan.

I see two solutions:
1: No variable interest rates at all. you get a credit card at 15% and it's 15% forever. A bit brute force, but it would work better than what we have now.

2: A set of specific circumstances under which an interest rate can be raised, and by how much for each one. For instance, your contract would state "your interest rate will rise by 2% for every day you are late on a payment."

what do you guys think?

Many people have had severe financial problems caused primarily from variable interest rates. You borrow an amount at a rate you can pay, and for whatever reason (maybe you were late on a payment, maybe your credit score dropped) they change the interest rate, meaning that you now owe more than you expected when you initially took the loan.

I see two solutions:
1: No variable interest rates at all. you get a credit card at 15% and it's 15% forever. A bit brute force, but it would work better than what we have now.

2: A set of specific circumstances under which an interest rate can be raised, and by how much for each one. For instance, your contract would state "your interest rate will rise by 2% for every day you are late on a payment."

what do you guys think?

There are plenty of worse things in modern economics. I don't know why anyone would get one of these, but if they're stupid enough to sign it, they should pay the costs.

Absolutely not, because that would have several massively negative effects on the economy both in the short and the long term. The first is making it very difficult, if not impossible, for people with poor credit ratings to secure lines of credit and the second would be a huge reduction in the willingness of companies to grant credit in general, with considerable negative effects on the economy due to the massive liquidity crunch.

The thing is, variable interest rates exist because people miss payments and default to begin with; if people were more responsible with their finances, the risk of lending would be lower and interest rates charged would be lower. The sole responsible party in this case is the borrower; they should review the risks of credit before deciding to use it, and if they don't and end up in trouble, well...that's nobody's fault but their own. The banks have done nothing wrong (unless, of course, they outright deceive the borrower or something like that) and shouldn't be penalized for the irresponsibility of their borrowers.

Why should they be illegal?
I personally think they are a bad idea, but everyone should be able to make their own choices. It's not like the "evil mortgage companies" (tm) force you to accept their offer.

There are some situations where variable rates are okay, like if you're not going to be in a house for more than a couple of years and you can afford it when the rates do go up.
That's probably how I'm going to start in my frist couple homes. Military keeps you moving around a lot.

No, they should be determined by market forces which means can go up or down as they should. If you don't like variable rates, get fixed rate loan if you think they will go up.

No.

Fixed rates are expensive anyways. The lender doesn't get the luxury of fixed costs for him or her to get the funds, so unless he or she has the option of passing extraordinary increases (or decreases) on to the borrower, there will have to be a premium. That's why fixed-interest loans have higher rates.

As for your limited-time offer type things, they're a marketing tool. You wouldn't outlaw people getting two pizzas for the price of one because it might get them hooked on pizzas and then they end up paying full price.

Dont sign a loan contract if you're not 99% sure that you can afford it. Don't sign it if you haven't had a look at a spreadsheet and played around with different future scenarios.

If people stick to those rules, that would do a lot better than a hundred new regulations, which end up being outpaced by the innovation in the industry anyways.

It just seems to me that if I borrow a thousand dollars at a 10% interest rate, I should be able to expect it to stay 10%. Otherwise what's to keep a company from, say, jacking up their interest rates to 100% or higher because they feel like it?

It just seems to me that if I borrow a thousand dollars at a 10% interest rate, I should be able to expect it to stay 10%. Otherwise what's to keep a company from, say, jacking up their interest rates to 100% or higher because they feel like it?

The fact that you'd move your loan from that company to another company with lower rates.

What kind of rates people pay for house loans? Around here it's Euribor/Prime+0,3-0,4%
Our Prime is about 4,25 and Euribor slightly more.

It just seems to me that if I borrow a thousand dollars at a 10% interest rate, I should be able to expect it to stay 10%. Otherwise what's to keep a company from, say, jacking up their interest rates to 100% or higher because they feel like it?

The market, and of course the regulatory environment. If you charge 100%, other companies will still be offering their loans at some level lower than 100%, perhaps even lower than the original 10%.

As a result, you take out a new loan from that bank and use the money to pay off the 100% loan, with the result being they have only recouped the principal and a small amount of interest. That amount will be much less than the original 10% they charged and as a result will generate little or no profit for the company. The end result will be severely negative.

Many people have had severe financial problems caused primarily from variable interest rates. You borrow an amount at a rate you can pay, and for whatever reason (maybe you were late on a payment, maybe your credit score dropped) they change the interest rate, meaning that you now owe more than you expected when you initially took the loan.

I see two solutions:
1: No variable interest rates at all. you get a credit card at 15% and it's 15% forever. A bit brute force, but it would work better than what we have now.

2: A set of specific circumstances under which an interest rate can be raised, and by how much for each one. For instance, your contract would state "your interest rate will rise by 2% for every day you are late on a payment."

what do you guys think?


Wrong.

Variable interest rates is cheaper and more correctly reflects risks and their changes (it is efficient). So it's quite fair and equal both for borrower and lender.
Obligatory fixed rates would harm lender if one of many things changed and it would probably lose money. Hence, it would charge higher premiums with its fixed rate. Still, it wouldn't probably insured against risks enough and borrower would pay more. Not too efficient.

And you saying "Many people have had severe financial problems caused primarily from variable interest rates." that's maybe true and actual now in USA, but in general I could as well say that many people have had financial problems caused from fixed interest rates.

And when you say: "they change the interest rate, meaning that you now owe more than you expected when you initially took the loan. " it is not actually true. You don't owe more. You just pay more in interest.

Bah... My Czech Bank allows for 1, 2, 3, 4, 5, 10, 15 years or full lenght fixation of rates on loans only thing that changes is the interest rate.
You then choose, if you think that on the long run rates will go up (as is now) you get a long fixation, if you think that rates will go down short fixation.
It's just a question of actually reading what you are signing and taking an informed decision (which, sadly, not many of us do).

BTW, the interest rate for full time fixation is about 1% higher than the one for 1 year fixation. No big deal then (and in Crech Rep. interest rates on loans are to a historical minimum)...

When one gets a mortgage, we have the option to get a fixed rate or variable.

While variable carries more risks, it is more profitable for the borrower in the end because if one has good credit, you can renegotiate with your bank to lower that rate when the rates to do go down, which means your overall interest is lower and easier to pay back.

To make it illegal would make no sense. Regulating it helps ensure the delicate balance is maintained.

Bah banks and the like bah humbug, scamming, greedy bastards.

Heh now I have that off my chest. It seems to me that if you are in the money business, then making money is far more important than customer satisfaction. So I have little to do with them nowadys, I have a council house, I don't have credit or debit cards, I pay cash for everything, if I ain't got the cash I can't have what I want.

My wife was sent a letter for late payment of a bill the other week, and along with the letter demanding £300, was the bill for a further £75 admin charge. I took care of that one for her(my blood was up, so I got onto the phone)admin charge? Whats that then? Isn't an admin charge what you pay your staff in their salary for sending me letters? Why should I have to pay your staff wages, I ummm err politely asked the man on the phone, without swearing.

If you loan somebody money, yes by all means charge some interest, I mean we all need to make money to live, but the power to up that rate does seem, well not playing fair huh!

When one gets a mortgage, we have the option to get a fixed rate or variable.

While variable carries more risks, it is more profitable for the borrower in the end because if one has good credit, you can renegotiate with your bank to lower that rate when the rates to do go down, which means your overall interest is lower and easier to pay back.

To make it illegal would make no sense. Regulating it helps ensure the delicate balance is maintained.

It's only more profitable for the borrower only if he/she wins. On the flip side if the interest rate goes up you can't pay and lose you property entirely. So you are essentially gambling all your previous investment for a chance to lower few hundred dollar every month. I think that kind of wager is worst than going to a casino.

I would not suggest variable interest rate for anyone unless they have done their homework on the economic trend and are pretty sure the rate is going to drop. For those who are not sure it's best to get it fix.

There are plenty of worse things in modern economics. I don't know why anyone would get one of these, but if they're stupid enough to sign it, they should pay the costs.

I agree.

It just seems to me that if I borrow a thousand dollars at a 10% interest rate, I should be able to expect it to stay 10%. Otherwise what's to keep a company from, say, jacking up their interest rates to 100% or higher because they feel like it?
So you get a fixed rate loan