I’ve seen in a few places that the super-rich can unlock their wealth ‘tax free’ by taking out a loan secured against their shareholdings or other assets, then use the cash from the loan to buy real stuff.
But how do they pay back the loan?
In: 196
You don’t need to pay back the loan, because the bank is more interested in the… umm…. interest, that the borrower pays.
Note that through paying interest, the lender is slowly gaining money back to offset the money lent out, whilst still been able to claim back the full value of the original loan. That’s where the profit comes in.
This isn’t exclusive to the rich – you just need to have assets to secure a loan. A house mortgage is the same thing – as well as people re-mortgaging their homes to use it as collateral for funding their start-up businesses.
The banks main concern is that you keep paying back the interest. If the borrower doesn’t pay back, the bank can then just force liquidation of the assets (sell them off) in order to pay back the loans.
Because of this, the interest is generally low, due to how low-risk it is. Conversely, this is why if you have very few assets and want a loan then your interest rate is going to be very high – because the chances of the bank recouping its money is far less secure and so they want to recoup the cash back as soon as possible.
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