Imagine this: you pay a bank to hold your money in a savings account instead of the other way around. It sounds counterintuitive, but with the coronavirus throwing the global economy into a tailspin, some banking systems in other countries are offering negative interest rates on savings accounts and loans—and some economists say negative rates could make their way to the United States.
Here’s what you need to know about negative interest rates and how you can use them to make money.
How do negative interest rates work?
Banks in Europe and Japan are using negative interest rates to stimulate their economies by offering incentives for consumers to borrow money. Normally, a borrower pays a lender interest while they repay a loan, such as a mortgage. But amid today’s shaky economy, some banks are offering negative interest rates to customers who borrow money, such as to buy a house or a new car. This helps consumers chip away at their debt—encouraging people to spend and borrow money.
At the same time, these banks are charging customers interest to hold their money in savings account, which disincentives people to save money when the economy needs a surge in consumer spending to correct course.
Sweden’s Riksbank was the first bank to offer negative interest rates when it cut its overnight deposit rate to -0.25 percent in 2009. Since then, central banks in Europe in Japan have adopted negative interest rates. These banks still make money when lending negative-interest loans by charging customers fees to borrow money. For example, when borrowers obtain a mortgage with a negative interest rate, they still have to pay their lender closing costs and loan origination fees.
Meanwhile, when a bank offers negative-interest savings accounts, the customer must pay the bank a fee for parking their money there. It’s like a storage fee, essentially.
How can you financially benefit from negative interest rates?
Although the U.S. banking system has never implemented negative interest rates, some politicians and economists are pushing the Federal Reserve to cut the federal funds rate to below zero. For example, President Trump said in September 2019 that the Fed should reduce interest rates “down to ZERO, or less.”
Last month, though, the Fed dropped its benchmark interest rate to zero—making borrowing costs as low as possible for businesses and consumers. And at this point, with the coronavirus still taking its toll on the U.S. economy, the Fed could theoretically lower its position to a negative interest rate.
So, how would negative interest rates impact U.S. consumers? Put simply, they would spur people to spend and borrow more—i.e., to help people buy houses and take out mortgages—and save less, which would prop up the economy. Negative rates would also lead many homeowners to refinance their mortgages and allow them to save money. Negative rates also encourage homeowners to borrow money to make home improvements, since borrowing is cheap. The drawback? Negative interest rates would also make it more difficult for people to save money.
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In terms of how negative interest rates would affect U.S. banks, economists are split. Some say banks would be on board with offering below-zero rates because they’d still earn a small net profit. But other economists say banks would be reluctant to pass on negative rates to their customers because it would encourage people to move their assets. If that happens, it would create funding strain for banks and push many investors to look for investment opportunities outside the U.S.—meaning the strategy could backfire and hurt the U.S. economy.
Because negative interest rates are still a relatively new practice, no one can say definitively how they would impact the U.S. economy. But, recent research from the University of Bath found that bank margins and profitability “fared worse in countries where negative interest rates were adopted.”
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The bottom line? Although negative interest rates in the U.S. are unlikely in the immediate future, there’s a chance that they could be on the horizon. It ultimately depends on how the coronavirus outbreak affects the nation’s economy in the coming months.