On average stock markets make about 7% per year adjusted for inflation. So given the choice of lending a stranger money who will give me <7% APR or putting it in the stock market for a few years I would put it in the stock market since it has a longer track record of making money (the borrower has a higher chance on defaulting than the stock market has of never rising) and on average gives higher returns.
So my question is this: Wouldn’t it make more sense for the money bankers lend at less than 7% APR to put in the stock market? How would they make more money by lending it to me?
Here are the 2 reasons I can think of off of the top of my head:
- Credit cards also make money from Merchants each time I buy
- If I fail to make my payments for a long time I will owe a lot more money.
The first sounds reasonable but then again banks give loans at lower levels so that can’t be the only reason. The second option still doesn't seem to make a big enough difference to justify this since the banks will make more money from compounding in the stock market.
Am I missing something obvious here? It seems like it’s always in the best interest of banks to put their money in the stock market than to give to individuals?