How to make money off the bank! This just might blow your mind

To be clear, I do not recommend doing it this way. This is for illustration purposes ONLY in order to reveal to you that what you THINK you know about money just AIN'T so...

[tmooeetv]

How can I get ahold of you to get some more information?

[coreygallon]

I appreciate the thought experiment. This is, however, a great way for a bank to go out of business! The reason that term deposit (CD) rates are so very much lower than term loan rates (the auto loan rate, in your example) is that banks can't survive with a cost of funds so close to the price of their loans. Bank deposits are their liabilities, which they use to lend. The interest they pay on deposits factors into their cost of funds, among other sources.

In your example, paying the term deposit rate (4% annual, compounded) is _much_ higher than a viable bank could pay when lending at a 6% loan rate (simple interest fixed). The cash is zero-sum ... your interest payment received ($6, 530.01, when calculated) is the bank's outflow. This is offset against their interest received on the loan ($4, 799.04, when calculated) and they can't do that at scale, hence this isn't at all feasible. I realize that your aim is to motivate a conversation about whole life insurance policy "self-banking", but this isn't a useful example.

Your example would be better explained as finding a 4% compounded rate of return on the $30, 000 as an offset to the $30, 000 simple interest fixed-rate term loan. The CD issued by the same institution as the lender doesn't work.

Just trying to be helpful. I appreciate your content! Cheers!

[ronloftis]

so what....If I paid 30k cash for the car and then made the car payment to myself of $580 a month compounded monthly at 4% I have $38581 at the end of 5 years. I can do math too. So my way I have even more money to buy a car at the end of 5 years. In your example, you forgot to mention you still have a payment of $580 a month.