It is not widely known that banks charge borrowers interest twice on their loans. They do it without you knowing it has gone, and here is why and how.
You take out a loan for $500,000 at 6% over 20 years, and they tell you the payments will be $3,633 monthly for 20 years. All banks use the same formula, where money earns money on deposit. This was reasonable when banks only stored the monarch’s money, and the banks took all the risk of the money not being repaid. The same approach was used whenever money was tied to gold, but that changed when President Nixon took the US dollar off the gold standard, and the US dollar became a fiat currency.
As the US dollar was and still is used for most international trade, other countries followed. The banking reforms of 1980 changed the Australian dollar to a fiat currency. This allowed foreign banks to compete in Australia, making Australian banks more profitable. Like banks in the USA, Australian banks continued to charge a surcharge on money they created for the government because they did not change the formula for interest calculation.
The formula, still used by the banks, is to add the interest to the amount owed each month.
The starting loan is $500,000, and the bank adds the monthly interest of $2,500, meaning the borrower owes $502,500. This made sense when the bank was supposed to have an extra $2,500 in gold to cover the interest. However, with a fiat currency and the government being responsible for the money, it is unnecessary because, as with Covid, the government can tell the banks to put extra money into accounts to cover the needed amount. They do not have to dig up extra gold and put it in their reserves.
The modern monetary movement in the 1990s pointed this out, but governments and banks have ignored it because they continue to act as though they had to find gold to put in the bank. Even worse, next month, they charge interest on the interest, and if you don’t pay it, they charge you extra.
Banks know what they are doing because they don’t do it with loans between banks and some favoured wealthy clients. Wealthy or favoured clients have mutual credit arrangements where they leave cash in the bank, collecting no interest, and the bank does not charge interest on their loans. This has resulted in a massive transfer of wealth from most of the population to the wealthy few because the world's billionaires get zero-interest loans to buy up businesses. They then transfer the loans to the companies and keep the company profits themselves. After a while, they put the companies back on the stock exchange.
The leak of the 7,600 wealthiest US citizens revealed how widespread the approach was. It is reasonable to assume that Australian banks, following the US banks in adding an unjustified extra interest charge to borrower’s loans, act the same way as the wealthiest Australians.
Banks don’t have to act this way, but they continue. I complained to the bank through the Australian Financial Complaints Authority (AFCA) about the extra interest charged on a business credit card account. The bank offered me $500 to withdraw the complaint, but I continued. The bank and the AFCA said I knew what I was signing up for when I took out the credit card, and as it was standard practice throughout the world, the bank was allowed to keep doing it.
I complained to the ATO that banks were collecting extra income from loans, calling it capital gains. The ATO responded that it was the standard practice and could not consider the complaint as the banks obeyed the law. If I wanted to do something about it, I would have to get my elected representatives to change the law.
Where Can You Find an Ethical Bank?
The sad thing about double-interest payments is that they make communities poorer and distort whole economies. It is no accident that societies' productivity drops the richer they get. It is inevitable because when wealth is concentrated among a few, money moves slowly on average, so there is less production for the same amount of money. This means bad practices like burning fossil fuels continue because the wealthy make money by buying existing assets and believe wealth will shield them from harmful societal consequences.
Necessary changes, like addressing climate change, do not happen.
The change to a single-interest payment loan does not happen because shareholder bank executives tell its shareholders: “Each month, on average, we will make a gross profit of $1,549 on which we pay tax and a capital gain of $1,549 on which we do not pay tax and which will benefit the shareholders when they wish to sell their shares and collect dividends. Even though we could change, we are not doing the right thing by our shareholders, and you, the shareholders, will sack us.”
Community banks owned by borrowers and depositors say they cannot compete with shareholder banks unless they charge double interest. This is probably untrue, but banking is a community, and anyone breaking ranks may find the wrath of the community descending on them. Requests to community banks for them to break ranks have been unsuccessful.
However, local, state, and federal governments could get one or more banks to break ranks on government loans and stop charging them double interest, provided the banks also gave single-interest loans to all their customers.
Alternatively, the Reserve Bank and/or Treasury can stop regular shareholder banks from collecting capital gains to which they are not entitled and on which they do not pay tax. In doing so, they will halt inflation and halve the cost of buying a house. That is unlikely to happen unless the Australian voters find a government willing to “take on the banks” and stop borrowers from paying interest twice.
What can an Individual do?
We know that if enough individuals complain, politicians in a democracy will change. If many people with loans on which they pay interest complain, then politicians will react.
If you see on your loan statement that the bank has added interest, write to them requesting that they transfer the interest they have collected to another account you hold because they have extended your loan.
Send a copy of your request to the Australian Financial Complaints Authority at https://www.afca.org.au/ and send a copy to your local council, local state member and local federal member and senator.
