negative interest rates and the effects on the average Joe
In: Economics
When you borrow money, you usually have to pay back that money (the principal) and a little extra (interest).
So a negative interest rate means that instead of paying a little extra, you pay less than the original amount! Free money!
Now for obvious reasons such loans shouldn’t exist: after all, people would just loan all the money available, knowing that they will never have to pay back the full amount.
But in certain situations, countries DO want to give out money to people, because they believe giving people money will allow them to do business and grow a country’s economy.
So what these governments do is offer negative interest loans to institutions like banks, who will then use that money as part of their business. This money is used to offer commercial loans to regular people, or for investing in businesses.
So what does this mean for an “average Joe”? Well, when he applies for a loan at the bank, his interest rates will be lower (since the bank got free money, it can offer its services for a better price). Or maybe he gets to keep his job instead of being fired (since the bank used the free money to invest in his employer) etc.
Now this is all a bit of a simplification, but it illustrates how negative interest rates can be used as a tool.
Latest Answers