And in the process of doing that, Bank itself makes good amount of profit.
To understand this, let me first ask you.
Have you taken any loan from bank ? It can be home loan, vehicle loan , personal loan or any type of loan. In today's so called middle class or salaried class, almost everybody has taken loan from bank. The interest rate may vary from around 10 % to 14% depending upon the type of arrangement you have with the bank.
Although you have taken loan, still you must be having decent amount of savings , which are lying in savings account, fixed deposits or similar instruments. Best rate of interest you must be getting on these is to the tune of 4 % to 8 %.
Now in your loan and deposit , there is a decent gap of around 2 to 3% on the interest you earn (& pay 33% tax) and interest you give. In other words, bank has taken money from you at 7% and given it back to you at 10% ! The two transactions may be in same or different banks but ultimately the story for you is same.
Also, you pay interest on interest but whereas what you get from bank is a simple interest. Does this really makes sense ?
To some extent , yes , we need to have reserves for any kind of exigencies. This may be equivalent to two months or three months of monthly expenditure. But, it has been seen that without any consideration of loans and the interest component , we keep our surplus money very casually in fixed deposits or even in saving accounts.
This is not a great planning at all.
In fact , by doing this, we are very generously , DONATING money to banks. And that's how banks grow and pay decent perks to their employees.
That's why , there used to be a penalty in case you pre-pay your loan. Wow !, you are offering to give the loan back , but lender is interested in taking it at a later date.
Because that is how , the lender is making money.
If you are intelligent person ,you must not fall prey to this system. You must start investing in instruments which can give positive returns (after taking care of taxes + inflation). So, even if you are earning a very conservative return of say 18% on your capital, even after paying taxes and considering for inflation,still you are adding on to your wealth.
And there is no dearth of such instruments !
And you do not require to be an investment wizard for learning to take part in these instruments !
And last , you can be a passive investor also and still make the kind of returns I am talking ! Join our workshop.