If a bank charges interest as they inherit the risk, does not the charging of interest increase the risk of the person not being able to pay back the loan. Thus the interest has to increase based on the interest charged. As a result the risk will increase, which should therefore increase the interest etc etc
Technically interest should increase to infinity.
The first thing is, this dude hasn't the slightest fucking clue how banks or interest work. Since I have a degree in Accounting (and have spent 20 years in various accounting-related roles) I tried to educate him on this, but he was just not having it. He was determined to think this question of his was a Catch-22.
On the surface it is. If you charge a poor person a high interest rate, it would in theory make it more likely they'll default. What dipshit doesn't realize, though, is that the game is rigged in the bank's favor, so while there might be more risk of a default, the bank isn't necessarily going to take a bath on it. If someone defaults on a mortgage, the bank takes the house and auctions it off to recoup their investment. If someone defaults on a car loan, the bank takes the car and auctions it off. On an episode of Last Week Tonight With John Oliver about a year ago, they bought a 2003 Kia Optima that had been sold, repossessed, and resold like 8 times!
And the way dipshit phrases this is pretty dumb. Most loans are fixed, so the bank isn't constantly increasing the interest rate. Thus the interest rate would not "increase to infinity." There are also usury laws that are supposed to cap interest, though naturally Republicans have weakened those, which is why your credit card company can charge you 35% interest and payday loan places even higher.
I'm no fan of Big Banks, but this guy had me actually defending them. In his universe, all banks do is "type numbers in a database" and should get a flat fee of $50 for that. I'm not sure where he thinks the money for a loan actually comes from. As Jimmy Stewart explains in It's A Wonderful Life: It's in Bob's house and Fred's house...and so on. The money loaned from a bank comes from the bank's reserves generated by deposits, investments, and interest from loans it makes. Where Big Banks got into trouble was making too many bad loans that they packaged and sold as "derivatives" which no one really understands but eventually turned toxic and caused the banks to tank. This was more because they weren't really paying attention to who they were loaning money to, not because of the interest they charged.
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I like perusing the reddit, "Explain this to me as if I were 5." It has questions and ponderings like this, but with the caveat that they don't know any better and it may be the stupidest question ever. It kind of diffuses people from attacking them.
I don't really get how that was meant to be a brain teaser? I only know that raising interest rates on credit card debt has lead to bankruptcy for some people I know. Therefore, it can't go on for infinity. Teaser solved..lol.
Who knew that accounting would help you beat bar bets?
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