How do Negative Interest Rates Work

Source: riskquest.com

In several countries in Europe and Asia, especially in the UK, more and more banks are offering negative interest rates. It sounds too good to be true for a lot of people which is why I want to delve further into this topic and explain how it all works.

In the 20th century, the baby boomers and Generation X enjoyed quite a lavish lifestyle after World War II, especially in countries such as the United States and the UK. With Paychex being so high and the prices of all products being so low, the people in the 20th century could buy anything for a very low price. In fact, some people have bought large houses for less than $10,000. Even with inflation in mind, that is still very little money.

Unfortunately, today, the story is entirely different. All products are much more expensive and we do not have that kind of cash in hand. This is why millennials and generation Z have to resort to mortgages, loans, and every other method of borrowing money. The prices of all cars and homes are inflated by 2000% when compared to the past. You cannot find a nice piece of property anywhere without having to pay $100,000.

However, in certain countries, for example, the United Kingdom, people can finally enjoy the freedom of buying a house without having to worry about immense debts. This is all thanks to negative interest rates.

For many people, this kind of service hours on real, but it does exist, and for good reason. You can use this to your advantage right now to finally become a homeowner.

How does it work?

Source: ahvalnews.com

Like I mentioned previously, negative interest rates sound too good to be true and it does not make any sense why they would exist. Why would the lender pay the borrower money when they are the ones at a risk? It does not make sense, right? Yes, I acknowledge the fact that it does sound weird, but there is a good reason why it exists.

The explanation as to why banks would offer such a service is simple. When a certain country or even entire continent starts to suffer from deflation or is in an economic crisis, people start to save their money in cash and wait for that crisis to pass. However, if this situation is not handled properly, the crisis will not pass. It will remain and it will stay for years to come.

The government needs to do everything in its power to try to balance the economy. Unfortunately, as more people are afraid of the crisis, they avoid making any kind of purchase. This throws down the economy of the country even deeper. Since no one is buying anything, there is no money in circulation which ultimately ruins both large and small businesses.

To prevent this from happening, central banks offer negative interest rates to inspire citizens to spend their money. Not only will this help the citizens of the country in an economic crisis, but it will also boost the economy. It is an effective method of battling the fear of losing money and property.

Can you find negative interest rates today?

Source: fool.com

Now, since you understand what a negative interest rate means, you will probably be interested in finding such an offer. But, even though the economy is not great right now because of the coronavirus pandemic, it still pretty stable and banks have not resorted to this method.

However, right now, United Kingdom is not in its best position. Central banks may not be offering any negative interest rates, but they are offering ones that are at a historic low of 0.10%. For more information on why the interest rate in the United Kingdom has dropped so much in the past few years, click here.

But, I also have to mention that there are certain countries today with a good economy that support negative interest rates. Switzerland, Sweden, Japan, Spain, Denmark and a few more offer such services. Right now, it is expected that the LIBOR rate for Switzerland is going to be -0.79 for the next two years.

Could this be used to your advantage?

Source: forbes.com

All of this can be quite a lot of information and confusing. I understand that. I also understand if you are wondering whether you can use this information to your advantage. For example, could you use negative interest rate loans to pay off your mortgage? Well, yes, that is definitely possible, but of course, only if you are in the right country. If you are in Switzerland, you are in luck.

Although, it does not sound bad at all if you get a loan in the United Kingdom considering that the average rate is only 0.10%. That is still astronomically low.

Will there be a bad enough economic crisis to inspire negative interest rates?

Source: constructconnect.com

This is probably the question that many companies, individuals, and governments are asking themselves. What is going to happen in 2021 or in the next few years because of the coronavirus pandemic? With so many businesses shut down and many other businesses working only half of the time, that cannot be good for the economy, right?

Well, we cannot exactly know what is going to happen in the next few years. At the beginning of 2020, things looked dire. Many experts predicted that the US and European economy is going to crash quite hard. However, that did not happen. Although, it might. Either way, there were still some positive outcomes out of this awful virus situation.

In other words, we cannot exactly know whether there will be a bad enough economic crisis to inspire the use of negative interest rates. However, with how the situation is progressing, I think it is safe to say that we will not see a bad enough crisis or anything similar to 2008.

As you can see, even if negative interest rates sound quite too good to be true, they do exist and for the good of everyone. So, if you ever get such an offer from a bank, I advise that you accept it.

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