When debt is an asset

[jaysabi]

I don't really understand the rules in the United States or Europe regarding buying a house on credit, but why do people prefer to buy a house with a longer mortgage because buying a house with the installment credit that he pays, it will not stop the value of the house he has bought from increasing, meaning that he buys a house with a longer loan with monthly installments it will not stop him from increasing the value of the assets he already owns. The house as a property has a value that always grows every year. Currently, we buy an average house with a value of hundreds of millions Rupiah but in the end of the mortgage the value of the asset will reach billions Rupiah.

That is indeed an interesting take. I do believe that property serves as a 100% sure set asset that is bound to grow in value over years. Taking a loan for it is positive most of the times. There are companies that do make it all easier and also aid people in the same. I think same might go for cryptocurrencies like bitcoins. I know some people who took loan from a friend or a bank to actually buy some bitcoins and at the end of the day he was not only able to repay it, but he made 10 folds!! But for sure you do need intelligent investment here, this can go the opposite side soon. I do believe that you should not extend it for that long ( 25 years!! ) You might have to give a lot of compound interest that way. But rather, you need to organize yourself, the assets are only worth it if they are not burdening you.

This is exactly the mentality that lead to the housing crisis in 2007-2008.  Everyone thought that real estate prices would go up forever, so no attention was paid to price.  People borrowed whatever they could to buy whatever they good.  The market was irrational, and eventually it crashed.  In reality, no asset is guaranteed to go up in value.  Not real estate, not bitcoin; nothing.

[Obito]

Depends on the housing prices, I mean if it's steady for about 25 years with the mortgage, there's a possibility that your friend taking the mortgage is a good thing since owning a property will only get expensive as real estate becomes more expensive. Also, it's not like the interest rate to be paid is going to be really big because I think that if they were to pay it consistently, they would have it much easier.

[so98nn]

Oh sure you would like get that kind of money!

But I am not sure why the lender would give you money in the losses? Did not understand the concept you mentioned in the OP. I mean 1 buck less for 100, 10 for 1000 and million for 10th, dam, I think lender must need to think twice before going in the debt himself. 

Is there any concept that I am missing out from this lending technique? Or do we really have lenders who bear the losses for us. 

[oHnK]

I do believe that you should not extend it for that long ( 25 years!! ) You might have to give a lot of compound interest that way. But rather, you need to organize yourself, the assets are only worth it if they are not burdening you.

As far as I know, if people want to take out a debt with a maturity of 25 years so as not to burden the interest, the chosen interest is fixed interest and not compound interest because it will burden the person.  Even though the asset value will definitely increase, compound interest will still be a hassle.  Choosing compound interest is for savings, not for loans.  Like the concept of a home loan, there is still a choice of fixed or single interest and compound interest.

[Dragonfund]

I don't like debt and I  proud of myself that the level I have attained today, I owe nobody no shit, not financial or whatever because I fear, when I'm no more, it would become financial burden to my love ones, I always try to contented and never go beyond my limit to the extent of taking debt.
As long as the debt hasn't been settled, that asset belongs to whoever lend it to you, its better you pay it back as soon as possible then you claimed it later.
I can see some comments above me saying real estate and high cost of house in near future. You all forgot "what if analysis".

[paxmao]

What's the purpose of the negative interest rate.? Is it deliberate to encourage borrowing and stimulate growth? And who lends the money, government, banks, regular people etc? I assume typical profit oriented lender would lend in anticipation of profit.Or does the lender profit in another way?

Exactly: negative rates are a punishment for holding your own money in the bank account instead of spending them helping the economy recover (I have actually forgot which crisis should they recover from...). Saving is not a virtue anymore.

To add to this, the lending of money is done at different levels. There is a banking lending, retail and business, based on a fiduciary model mostly, in which the banks lend a multiple of their deposits. There is state debt lending, referred usually as "interest rates" in general, which is the price the government pays for its debt. There is also an interbank rate for lending.

Usually, these are all linked together, negative yields for state debt may lower the rest to negative.

I do believe that you should not extend it for that long ( 25 years!! ) You might have to give a lot of compound interest that way. But rather, you need to organize yourself, the assets are only worth it if they are not burdening you.

As far as I know, if people want to take out a debt with a maturity of 25 years so as not to burden the interest, the chosen interest is fixed interest and not compound interest because it will burden the person.  Even though the asset value will definitely increase, compound interest will still be a hassle.  Choosing compound interest is for savings, not for loans.  Like the concept of a home loan, there is still a choice of fixed or single interest and compound interest.

You seem to be clueless about how debt works. It is always compound, simple interest is not used on loans 99.9999% of the times.

[Darker45]

I'm not thinking of making a loan in this situation. Taking out a bank loan may be a good option for those who have a steady income every month but the ongoing pandemic situation can overwhelm borrowers with interest payment.

Crypto loans may also be a helpful solution, but we need collateral to do so if the amount we want is to build a house. I really haven't thought about making a loan either in crypto or with a bank so far. I'd rather save than pay interest that's hard to agree to.

Actually, the setup is attractive to borrowers but not to lenders.

Anyway, inflation is a feature of the the fiat system which encourages borrowing especially long term. As years pass by, your regular amortization becomes less and less of a burden. If you take a 30-year housing loan, for example, by your 10th year of payment, or even earlier, your monthly amortization could be considered a small amount already since the value of fiat is depreciating over time. The constant devaluation of fiat makes your loan responsibilities lighter and easier to pay in the future. Not to mention that you'll have an increasing salary and the value of the property you bought with that loan is also increasing.

Now if you compare that with Bitcoin or a Bitcoin-denominated loan, for example; supposing you borrowed 1BTC just 5 years ago, would you be having a harder or an easier time paying it now?

[Silberman]

One thing I know is that debt is not always a bad thing as has been portrayed by the society. The right kind of debt has its advantages, of course when used by the right person. I read somewhere that, “net worth and debt are positively correlated: the more debt a household has, the more likely they are to have substantial financial assets.” However, this applies to good debts only. Good debts are assets for example durable investments in a house, a business, or a college degree which in turn make the individual profitable in the long run while on the other hand, bad debts drags the soul of the debtor to the ruins of extreme poverty.

Unfortunately it is not that simple in a society in which everything can be purchased on credit, I agree that credit can have its place but not in the way it is used by people, after all even if you ask for credit for things that seem to be worth it like a house, a business or a college degree as you say this does not mean that it is a good idea, if you ask for a credit to buy a house you could be buying at the top of the market and then lose your house when the prices of houses crash, like what happened during the 2008 crisis, not all college degree are created equal which is why there is a time bomb on the US with those loans and a business can fail before it even begins as it happened to a lot of people during this pandemic.

[Hydrogen]

Around 10 years ago, former comptroller of the US government accountability office did a nationwide publicity tour. Where he tried to warn americans of the dangers posed by unfunded national debt reaching upwards of $400,000 per household. Of course, at the time he was completely ignored. No one took him seriously except for "conspiracy theorists".

https://www.youtube.com/watch?v=xjmCiDB_72g
Former U.S. Comptroller General David Walker on The Federal Fiscal Crisis

I don't support the idea of debt being an entirely evil thing. It can be useful and fair in buying a car, a house and things on credit.

The issue with debt is the lenders are usually much more educated, motivated and informed than the borrowing demographic. Over time the scale slowly dips in the favor of lenders. The trend accumulates into growing inequality and systemic unfairness. Until we reach a crisis point, where it is no longer sustainable.

[glendall]

just found out there is a negative interest rate, there is a plus plus in my country, you can clearly say that you are given free money,
I personally stay away from debt at this time and so on, because debt is only a shortcut to speed up wanting to own goods or anything, what's more, in my country the interest rate reaches 2% of the loan if the interest rate is late the daily rate runs

[Poker Player]

just found out there is a negative interest rate, there is a plus plus in my country, you can clearly say that you are given free money,
I personally stay away from debt at this time and so on, because debt is only a shortcut to speed up wanting to own goods or anything, what's more, in my country the interest rate reaches 2% of the loan if the interest rate is late the daily rate runs

It is not very clear what you are saying. Which country are you talking about? As far as I know, in countries where the interest rate is negative, it is negative only if you deposit your money, not if you take a loan. Therefore we cannot talk about free money. Free money would be if you were to ask for a personal loan and the interest rate was -2%, but what happens now, as far as I know, is that if you ask for a loan they charge you 4%, or 8% or whatever depending on your personal situation and if you leave your money on deposit is when they apply a negative interest rate.

[iv4n]

15 years ago (more or less) Minister of Finance, and all other relevant institutions, advised people to take a loan in Swiss Franc, with a very low (the lowest ever) interest rate, a lot lower than if you take a loan in my country currency or in Euros! Swiss Franc was under $0.5, now it's almost $1.1! One client took a $50k loan in Swiss Francs, after 8 years of paying the loan he owes +$20k more!
So I am not buying that negative interest rate, there's just something you don't see, and that something will show up sooner or later, and it will fuck you up!

Debt is an asset! It's a powerful secret weapon! Without debt, modern slavery wouldn't exist!

"There’s class warfare, all right, but it’s my class, the rich class, that’s making war, and we’re winning (New York Times 26/11/2006).”

This cynical statement has the merit of clarity. We are talking here of war, economic war that is not constrained by borders and does not bother about nationalities, only about the interests of one social class. This type of war is responsible for millions of deaths each year, it is comparable with armed conflict. As the capitalist economy has become global so, along with it, has economic warfare.

This remark is intentionally general. I want to present a wide framework in which many different situations may exist. My presentation is not cover all situations and will not be giving lessons to anyone or talking in the place of anyone. Each country or group of countries has its own experience in terms of public debt and I come here, just as much, to learn about them; from you.

My intention is to show that within this global economic war, which, because of the crisis, has attained an exceptional scale, debt plays a crucial and central role.

For people who would like to read the full article: https://www.cadtm.org/Debt-a-weapon-of-mass-destruction

[davis196]

The fact that negative interest rates are a norm in the US/EU doesn't mean that the banks are throwing money at the people for free.The are application fees and down payments.It's not that easy to get accepted for a loan.
Anyway,I get your point.In a financial world dominated by negative interest rates,saving money is not worth it and debt becomes really desirable.Thank God we have Bitcoin,so we don't have to bother about where to save and invest our money.

[Samandra]

When you take a long-term loan, the debt will eventually fall on yourself, and the higher the house price, the heavier the final debt. The annual price increase of the house exceeds the inflation rate, resulting in the value of your original mortgage being much lower than the value of your house in the future. This ongoing pandemic may make the borrower unable to pay the interest.

[worle1bm]

The most people prefer to acquire assests by taking debts these days and prefer to pay them over a certain period of time.It may have positive as well as negative factors like you get extra burden on yourself with embracing interest rate over the debt amount for certain period of time along with principal amount.But you can easily have what seems not under your budget in short span of time so you can say you have assests that you can't have and own easily with your income.But in the long run prefer those things that don't put certain burden on you and trap you into vicious circle of debt trap.

[Taskford]

The most people prefer to acquire assests by taking debts these days and prefer to pay them over a certain period of time.It may have positive as well as negative factors like you get extra burden on yourself with embracing interest rate over the debt amount for certain period of time along with principal amount.

Just make sure that you didn't exceed on your profits so that your debt will not be a burden to you, If you manage well on your debt for sure those will became positive to us. But aside from this maybe we should check on where we spend our borrowed money since if we just take a loan then use it on crypto then maybe we can say that you are in bad place since we know crypto is kinda not good option if we talk about taking loan and use it on this area.

[AicecreaME]

Call me a traditionalist ... but if you want a roof over your head... and you cannot afford it... then you have a choice, namely :

Rent a house : Give money to a landlord (someone else) and never own property.
Borrow the Money : Take out the mortgage and pay the interest and own your own property. (Asset)

I own my house... I paid it off way earlier than what I should have, because I paid much more than what was required from the mortgage payments.  (Best decision I have ever made)  

I am this kind of person too.

Renting or loaning are the only options someone has if they want a comfortable place to live in. Both have their pros and cons.

In renting, you have no tax obligations because you are just renting, obviously. The landlord is the one responsible for the tax because it is his property. You can freely jump from one place to another because you are just a tenant, meaning you can move any time depending on your signed contract with the landlord. This is nice for those people who have to move from one place to another for various reasons such as work. They won't worry too much about a property they would leave behind because they don't owe one in the first place. However, this is costly IMO. Renting can take up a lot from your budget and when you calculate it, you could buy or build a house with that (if you want to).

Meanwhile, in owning a house by loaning, you will have a property that you can call your own after years of paying diligently. You will just have a hard time at first by paying monthly or yearly. It's like you are renting, but you're going to have it soon after. Although if you will compare the cost, paying monthly loans for a house is way more expensive than renting so you gotta have a budget for it to avoid penalties and additional interest rates. Owning a house via loaning is a good choice for those people who have planned to be settled in one place. It would also be a good decision for those people who want to have a family of their own. The cons of loaning a house are that it is costly and you are the one responsible for everything in it such as repair and maintenance. Other than that, i think it is a great form of asset because its value increases over time.

[magneto]

Not a crazy thought when it has already happened with short term interest rates.

Negative interest rates are only novel when it comes to retail interest rates. When it comes to central bank policy rates, many countries, including the EU and Japan, have already seen it happen in the past (or even present).

Especially with COVID, a lot of countries are feeling the need to stimulate the economy with ever lower interest rates. This system is NOT sustainable.

[Freezingel]

It might seem ridiculous for some people regarding debts, since the inflation rate and the interest don't make sense for some people. However, it's the only choice for someone else when they don't have enough money to afford something, and never will. Should they save up for 25 years before they could afford a house? no right. I guess it's good enough for him to mortgage a house, although the debt is difficult, but yeah that debt can be asset. He has house now, he can use it anytime for asset. The certificate for the house can be used as guarantee too if you need money, it's asset. If the price went up, since property always go up, it's such a great asset and you can gain profit from it.

[Poker Player]

It might seem ridiculous for some people regarding debts, since the inflation rate and the interest don't make sense for some people. However, it's the only choice for someone else when they don't have enough money to afford something, and never will. Should they save up for 25 years before they could afford a house? no right. I guess it's good enough for him to mortgage a house, although the debt is difficult, but yeah that debt can be asset. He has house now, he can use it anytime for asset. The certificate for the house can be used as guarantee too if you need money, it's asset. If the price went up, since property always go up, it's such a great asset and you can gain profit from it.

Although I generally agree with what you say, be very careful with what I have put in bold. House prices do not always go up. Precisely for thinking that, many people got into trouble in the 2008 crisis. In the short term house prices can go down, and if you are over-indebted you may have a problem.

Moreover, in general they are a good hedge against inflation but we must think about how much is due to the real increase in value and how much is due to the devaluation of the fiat currency that you use to buy houses.