Question

Question Help If you deposit​ $20,000 in a savings account at a bankLOADING...​, you might earn 3 percent interest per year. Someone who borrows​ $20,000 from a bank to buy a new car might have to pay an interest rate of 8 percent per year on the loan. Knowing​ this, why​ don't you just lend your money directly to the car​ buyer, cutting out the​ bank

Answer 1

The answer is: due to risk aversion

Step-by-step explanation:

Imagine all the money you had were those $20,000. You can choose to deposit them on a bank an earn $600 a year or lend them to someone else and get $1,600 a year.

I believe very few people would assume the risk of lending the money directly to a third party. Maybe if you know that person (e.g. maybe your brother) and really trust him or her, you could do that, but generally speaking, this rarely happens.

Every bank has a percentage of the loans they give out that are never paid back. Besides the costs incurred in running a business, banks also have to consider bad credits which will make them lose money. One of the duties of the bank is to reduce that risk and the number of possible bad credits, but they will never be zero. Imagine now that you lend your $20,000 to a bad creditor, you might lose all your money.

At the end it all depends on how much risk you are willing to take.