oops, guess that poll question range was too wide, not specific enough|
For those who answered
(some form of) Yes, a certain loan interest rate seems excessively high, the majority responded that "too high " starts between 5 and 25 %, and I'd like to see a breakdown on that. Please answer this question too!
At what interest rate for loans do you start to feel the rate has gotten excessively high?
Mean: 13.15 Median: 12 Std. Dev 3.94
|Date:||February 4th, 2009 02:11 am (UTC)|| |
To a great extent, "too high" can't be defined in isolation. It must be defined in contrast to the current rate of inflation. If inflation is running at 15%, then a banking lending money at 12% is losing money on the transaction. One really needs to talk in terms of "real" interest rates, rather than nominal.
Or, to make it clearer, if I could borrow money in Zimbabwe at 100% per annum, that would be a steal, because by a year later I could pay that loan back from pocket change.
Clearly the assumption of this poll is that we're talking about a moderately stable currency, such as US or Canadian $.
Inflation is a difficult thing to gauge. Who do you trust to define it and thus tell you what "real" interest is?
Yes, exactly. Current context and conditions are everything.
|Date:||February 4th, 2009 02:35 am (UTC)|| |
What type of loan? Short or long term? Secured or unsecured? How risky?
let's say long term, unsecured, risky (but in a reasonably stable currency: let's say an inflation rate of not more than 8%). Is there an interest rate at which you find yourself saying "Oh, come on, now! That's ridiculous!" or not?
I was hoping for a poll on variable rate loans, because those are what I think are evil. :)
well, and consumer credit cards have started to effectively become variable rate loans....
|Date:||February 4th, 2009 04:25 am (UTC)|| |
What makes them evil?
Note that variable doesn't mean arbitrary.
Presuming you mean ARMs, I'd tweak the statement slightly to say that they've been used by evil (or at least amoral) people to exploit people's ignorance. The ARM itself is just a financial tool; it means that the borrower takes the risk/reward of interest-rate changes instead of the lender, and is (or should be) compensated for that risk by getting a lower rate than a comparable fixed-rate loan.
ARMs make sense in two cases:
1) The borrower plans to pay off the loan before the rate adjusts.
2) The borrower believes that interest rates will fall (or at least stay level), and is effectively making a bet on it.
I have a friend who only borrows with ARMs. But he's very financially savvy, and wealthy enough to pay off the mortgage if he needs to; he only has it so that he can use the money to buy other investments.
The evil came in when unscrupulous lenders sold ARMs to borrowers that clearly weren't appropriate for them. And ended up bringing most of our economy down as a consequence.
I agree with dagibbs
. You need to consider the larger economy in order to determine what a good interest rate is. Another key factor is the term of the loan; one might expect a higher rate on a short term loan, for instance, which is a reason banks give for having high credit card rates and low mortgage rates.
In general, I think anything over 10% is excessive, but I admit that I have an aversion to paying interest. I would go for 6% on a mortgage, and as high as 9% on a credit card.
I'm also of the "it depends" camp, but for slightly different reasons. I think that it's legitimate to have higher rates for optional expenditures over things that are closer to necessities. Car loans and home loans should be under %10, preferably under %7 while I think it's OK to have 15% rates on credit cards. I realize some people use credit cards for the necessities of life, but I also think it's a really bad idea to carry a balance on your card for the necessities of life unless it's an ultra-emergency.
I can see that. Car loans and home loans are theoretically also lower risk, since they are secured by property that can be reclaimed if the borrower defaults on the loan.
|Date:||February 4th, 2009 05:05 pm (UTC)|| |
Who gets to define "necessity"? Neither a house nor a car is; I have neither.
Are you suggesting that rates should be lower when you borrow, but it's OK for them to be higher in cases where you don't borrow?
I think the only reason I answered so high is because of the credit card interest rates (those bastards).
|Date:||February 5th, 2009 04:47 am (UTC)|| |
I think it depends a lot on both the kind of loan (size, term, purpose), and the current state of monetary policy (which affects things like how high a return I get on my IRA and my bank accounts).