Why You Owe Nothing to the Bank That Lent You Money
It didn’t lend you anything it possessed, so it can suffer no loss.
When banks make loans they do not hand over money from their vaults. Rather, they ‘extend credit’: they credit to an account the amount ‘lent’.
(That credit is then used to make the purchases for which it was borrowed. For the seller, that credit counts as income, which can then be used for any economic activity in which that entity might engage.)
Of course, the bank still has hooks in the borrower. If there was collateral involved, the bank can lay claim to it. Also, letting a loan lapse does serious damage to a person’s credit score, which nowadays can affect getting a job or even renting a place to live.
Still, if you do stop paying on a loan, the only possible harm the bank has suffered is to lose out on money, in the form of revenue received out of the borrower’s income, it thought it had coming. We all know, however, that no one (or thing) can really bank on the future being what we hope it will be — as everyone who has been a victim of ‘downsizing’ can attest.
[The following was rewritten2/24/24: I had made a stupid mistake referring to credit cards—at that point thinking about one thing while writing about another.]
A purchase with a credit card is just like borrowing from a bank to make that purchase. The rationale for the higher interest is that all such debt is unsecured, with no collateral.
It is interesting that issuers of credit cards are willing to purchase debt — via ‘balance transfers’ — where they do have to fork over money to the other issuer, thereby putting at risk actual money from their coffers. It does seem curious why they would do that. Obviously, the rewards outweigh the risks.