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Compound Interest

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Zultra
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Post: #1
Compound Interest

I personally believe Compound interest is immoral, for example you could have a £1000 loan, by the time you paid everything back it would be £2000.

I personally believe it should be illegal to have compound interest on loans, mortgages etc...

Your thoughts on this......

This post was last modified: 21.04.2012 18:53 by Zultra.

21.04.2012 18:53
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Titian
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Post: #2
RE: Compound Interest

you have 5 seeds of wheat; instead of eating them, you decide to plant them. After some time you can harves 100 seeds.
Instead of eating them you decide to replant them again. Once you harvest them, you have 2000 seeds.

Another example:
You give up your free time and build a hammer in 5 hours. You then use your new hammer to build another hammer in just 2 hours.

Please start thinking before bragging about economics, social justice and similar stuff.
Understanding opportunity costs and increasing productivity based on capital saving and investment might also be useful to get you through your life a wee bit better.


"If you grab them by their balls, their hearts and minds will follow." (Yes, Minister)

This post was last modified: 21.04.2012 19:08 by Titian.

21.04.2012 19:08
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Kleptomane
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Post: #3
RE: Compound Interest

in the arab countries interest is prohibited... go there^^

in a few religions interest is prohibited... and personally, i can understand why... it has good and bad aspects, there's no black and white...


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Dr House
21.04.2012 19:26
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Titian
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Post: #4
RE: Compound Interest

well, is suspect that these cultures are a lot more inefficient. In the end, interest is purely natural. Capital growths over time (just like my examples above show).
So this means that if somebody asks me for a loan, I am faced with costs (in this case opportunity costs).
Why should I grant anybody a loan, if the costs that faces me with are higher than the returns I can expect to earn?
On the other hand one can also ask the question whether somebody should receive a loan, if the returns from that loan are smaller than the costs (i.e. the interest I have to pay to the person granting me a loan).


"If you grab them by their balls, their hearts and minds will follow." (Yes, Minister)

21.04.2012 19:43
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Globaltom
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Suedparadies
Post: #5
RE: Compound Interest

Zultra Wrote:
I personally believe Compound interest is immoral, for example you could have a £1000 loan, by the time you paid everything back it would be £2000.

I personally believe it should be illegal to have compound interest on loans, mortgages etc...

Your thoughts on this......


Well tell me if you do not have it as ought , but as benefitt
on a savings account , would you deny it.


War schon beim Impfen

This post was last modified: 21.04.2012 19:55 by Globaltom.

21.04.2012 19:54
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Zultra
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Post: #6
RE: Compound Interest

Titian Wrote:
well, is suspect that these cultures are a lot more inefficient. In the end, interest is purely natural. Capital growths over time (just like my examples above show).
So this means that if somebody asks me for a loan, I am faced with costs (in this case opportunity costs).
Why should I grant anybody a loan, if the costs that faces me with are higher than the returns I can expect to earn?
On the other hand one can also ask the question whether somebody should receive a loan, if the returns from that loan are smaller than the costs (i.e. the interest I have to pay to the person granting me a loan).


Lets have a example.

I get a mortgage a for £80,000 by the end of me paying it, the total sum of which is £100,000, they cannot lose at all, if you can't pay it they take my house (which is a physical thing it has worth) so the Banks have a win-win situation and no-one benefits it apart from the fat cats.


It's nothing more then theft.

21.04.2012 19:54
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Titian
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Post: #7
RE: Compound Interest

Zultra Wrote:

Titian Wrote:
well, is suspect that these cultures are a lot more inefficient. In the end, interest is purely natural. Capital growths over time (just like my examples above show).
So this means that if somebody asks me for a loan, I am faced with costs (in this case opportunity costs).
Why should I grant anybody a loan, if the costs that faces me with are higher than the returns I can expect to earn?
On the other hand one can also ask the question whether somebody should receive a loan, if the returns from that loan are smaller than the costs (i.e. the interest I have to pay to the person granting me a loan).


Lets have a example.

I get a mortgage a for £80,000 by the end of me paying it, the total sum of which is £100,000, they cannot lose at all, if you can't pay it they take my house (which is a physical thing it has worth) so the Banks have a win-win situation and no-one benefits it apart from the fat cats.


It's nothing more then theft.


You really have no understanding of Microeconomics, do you? Well, I shouldn't complain; Critics of the concept of maximizing total utility are often saying that the concept itself works, but that the people just don't use it because they don't know it...

The 'banks' (I prefer the term 'lenders') don't have an infinite amount of capital (in this case money) to lend out. Furthermore they obviously strive to maximize their earnings.
Now who do they lend their money to? Assuming that none of the loans they grant defaults, they'll obviously chose a borrower who is willing to pay the highest interest.
If that borrower happens to be not you, but you want the money really badly, you must offer the potential lenders a better deal.

Assuming that there are two parties, A and B, willing to take up a loan, and if A is willing to pay x% interest, then in order to receive the loan instead, B will have to pay x+n % interest. (You can see, it's a simple and basic market mechanism; the buyers compete against each other).

This mechanism will continue as long as the loan becomes unattractive for one of the two borrowing parties.
Let's say that A is a farmer who needs the loan to buy seeds whilst B is a factory owner who wants to buy a new machine.
A can generate a return of 10% from the loan within one year, whereas B can generate a 15% return.
Therefore A will offer a maximum interest rate of 10-y% (y in this case is the minimum personal income which is required to make the farmer to grow his crops. y is based on his personal opportunity costs: For example: These costs could arise from the farmer not taking up a job in the city because he needs to spend all his time on his fields).

In the end B will receive the loan for 10-y+n%.


If you take out a mortgage you yourself should be bloody aware of the costs that this action is going to impose upon you. And it is up to yourself to decide whether these costs are worth what you are going to do with the money.


"If you grab them by their balls, their hearts and minds will follow." (Yes, Minister)

21.04.2012 20:35
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Zultra
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Post: #8
RE: Compound Interest

Please justify how it's moral for you to pay £2500 when the original Loan was £500, that's plain theft the fat cats can't lose, if you can't keep up with the payments they call bailiffs to steal your goods or evict you, they just cannot lose.

So they earned £2000 by doing nothing, they produce nothing at all.

21.04.2012 20:50
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Helsworth
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Post: #9
RE: Compound Interest

Zultra Wrote:
Please justify how it's moral for you to pay £2500 when the original Loan was £500, that's plain theft the fat cats can't lose, if you can't keep up with the payments they call bailiffs to steal your goods or evict you, they just cannot lose.

So they earned £2000 by doing nothing, they produce nothing at all.

Interest in and of itself is amoral, excesive interest is usury. Banks live through the difference of interest rates. Since their revenues come from interest rates, they have to charge you more than the original loan in order to function. The banks intermediates funds of those who are willing to loan for interest to those in need of funds for investment or consumption. In my opinion interest with two digits is excesive, however there are far worser credit schemes in place meant to hook desperate people in need of cash which have interest figures with 3 digits, that's downright usurious. Like Titian suggested, learn first about economic concepts then judge how these concepts are applied or misapplied in day to day life.


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This post was last modified: 21.04.2012 21:04 by Helsworth.

21.04.2012 21:03
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Titian
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Post: #10
RE: Compound Interest

Zultra Wrote:
Please justify how it's moral for you to pay £2500 when the original Loan was £500, that's plain theft the fat cats can't lose, if you can't keep up with the payments they call bailiffs to steal your goods or evict you, they just cannot lose.

So they earned £2000 by doing nothing, they produce nothing at all.


if you cannot earn £2500.01+ by taking out a loan of £500 you should simply not take out the loan. It's simple, isn't it?

And how can you say that they don't produce anything? Ok, we shouldn't be talking about 'production' as much as about costs:
It is capital we are talking about. Capital can produce more wealth. Let's say they could purchase a machine with the money they decide to lend you. This machine could generate (after substracting all variable and fixed costs) an income of £2499.99. Logically they will only lend you the money if they can earn more by doing so.
The £2499.99 are a cost to the lenders if they lend you the money.
You should only take out the lone if the value that loan generates for you is bigger than the £2500 you are charged in the end.
Therefore both sides profiteer - this is called a symbiosis and the opposite to parasitism (the thing you are suggesting).

Furthermore there are other costs (such as inflation) to be considered.
Additionally they could consume the capital and increase their own total utility. If the value of the utility the could gain by consuming is bigger than the income generated by not doing so but lending out their capital, they naturally will not grant any loan.

What is it that makes these things so difficult to understand?




EDIT:
forgot this part

if they initially demand 400% total interest and this rate is higher than their total costs but there is nobody willing to pay that rate, then they will be forced to lower their demands step by step.
I hope I do not have to introduce the concept of supplier competition as this concept should be more than just obvious.


Helsworth Wrote:

Zultra Wrote:
Please justify how it's moral for you to pay £2500 when the original Loan was £500, that's plain theft the fat cats can't lose, if you can't keep up with the payments they call bailiffs to steal your goods or evict you, they just cannot lose.

So they earned £2000 by doing nothing, they produce nothing at all.

Interest in and of itself is amoral, excesive interest is usury. Banks live through the difference of interest rates. Since their revenues come from interest rates, they have to charge you more than the original loan in order to function. The banks intermediates funds of those who are willing to loan for interest to those in need of funds for investment or consumption. In my opinion interest with two digits is excesive, however there are far worser credit schemes in place meant to hook desperate people in need of cash which have interest figures with 3 digits, that's downright usurious. Like Titian suggested, learn first about economic concepts then judge how these concepts are applied or misapplied in day to day life.


I have to disagree with you to some extent. Interest is not amoral but simply natural as capital can produce capital and because individuals are faced with opportunity costs.

However, you are right that some people in some situations are simply exploited.
BUT: One always has to ask the question whether this is truely the case? Maybe some people still make a good deal when taking out a 3 digit interest loan because the costs of not doing so are just too high?
High interest rates become than immoral, if the loan-searching party is prevented (e.g. by legislation -> look at China) to find competitors offering better rates.


"If you grab them by their balls, their hearts and minds will follow." (Yes, Minister)

This post was last modified: 21.04.2012 21:07 by Titian.

21.04.2012 21:04
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