Currency adjustment clauses in loans

I’ll be the first to admit—I’m a total amateur when it comes to economics. Still, I can't help but wonder about the logic behind these currency clauses attached to savings accounts and loans, especially when the exchange rate isn't even expected to shift. For instance, if those clauses didn't exist, I'd probably pull the trigger on an auto loan for roughly $25000 tomorrow. To be honest, the fear of sudden devaluation is what stops me. But here's my dilemma: if both the banks and the government don't seem to fully trust the stability of the dollar—given how they bake these currency protections into almost everything—how am I (especially as a layman) supposed to have any confidence 🤷? This kind of clause has been around for the last decade or so (if my memory serves me right), so it doesn't really feel tied to our upcoming integration into the European Union ☕
So, please, help me make sense of this—I know my way around macroeconomics is pretty limited 🙏

There’s actually a whole discussion happening over on the politics board regarding this:

In any case, an exchange rate isn't something you can just dictate by executive order 😁—not here in America, at least, given how much our trade with the rest of the world is driven by open markets. Just because the Fed is attempting to use certain measures to nudge the dollar toward specific levels doesn't mean they’ll actually succeed. Think of a currency clause as a sort of insurance policy; it's how a bank protects itself against sudden shifts in the value of the dollar. Since most Americans tend to keep their savings in dollars, banks have to be able to pay those out reliably. If the value of loans issued in a different denomination were to suddenly plummet, the bank would find itself in a massive bind (and the savers wouldn't be far behind).

casuallynx8 said:There’s actually a whole discussion happening over on the politics board regarding this:

In any case, an exchange rate isn't something you can just dictate by executive order 😁—not here in America, at least, given how much our trade with the rest of the world is driven by open markets. Just because the Fed is attempting to use certain measures to nudge the dollar toward specific levels doesn't mean they’ll actually succeed. Think of a currency clause as a sort of insurance policy; it's how a bank protects itself against sudden shifts in the value of the dollar. Since most Americans tend to keep their savings in dollars, banks have to be able to pay those out reliably. If the value of loans issued in a different denomination were to suddenly plummet, the bank would find itself in a massive bind (and the savers wouldn't be far behind).

Thanks for pointing that out; I missed the thread over there.👍I'll head over there now.

Morgan Morgan5 said:I’ll be the first to admit—I’m a total amateur when it comes to economics. Still, I can't help but wonder about the logic behind these currency clauses attached to savings accounts and loans, especially when the exchange rate isn't even expected to shift. For instance, if those clauses didn't exist, I'd probably pull the trigger on an auto loan for roughly $25000 tomorrow. To be honest, the fear of sudden devaluation is what stops me. But here's my dilemma: if both the banks and the government don't seem to fully trust the stability of the dollar—given how they bake these currency protections into almost everything—how am I (especially as a layman) supposed to have any confidence 🤷? This kind of clause has been around for the last decade or so (if my memory serves me right), so it doesn't really feel tied to our upcoming integration into the European Union ☕
So, please, help me make sense of this—I know my way around macroeconomics is pretty limited 🙏

If we're talking about a currency clause for loans, and it's tied to the Euro, it’s not really something a person with a mortgage or a car loan should lose sleep over. After all, houses and cars are priced in Euros anyway, not dollars.

Just imagine you buy a car for $31667 (let's say a Civic), then the Euro climbs to $3.00, and five years later you sell it—not for $15000, but for $17333 (or basically $1,000 more based on today's rates). Wouldn't you say that's fair too?

QUESTION: Is the currency clause USATVNA? If it isn't, we need to scrap it immediately!!!

Let's just pay with the US dollar and start buying American products!
The banks are just using this to bleed us dry! The government needs to get rid of the currency clause once and for all.

It’s actually in the Constitution. I think it’s even mentioned in the statutes as a possibility, too.

James Hayes6 said:QUESTION: Is the currency clause USATVNA? If it isn't, we need to scrap it immediately!!!

Let's just pay with the US dollar and start buying American products!
The banks are just using this to bleed us dry! The government needs to get rid of the currency clause once and for all.

The government basically helped dismantle our domestic industry, so there aren't even any local goods left to buy. That's the real issue here, not some currency clause.

I don't quite grasp the opposition to the currency clause state. Ultimately, people took out loans in a specific currency. It stands to reason they should repay them in that same currency. We all had the option to borrow in US Dollars back then, but it didn't suit us because the interest rates were too high. So, we opted for foreign currency instead. It's simple logic... You borrow Swiss Francs, you pay back Swiss Francs. You borrow US Dollars, you pay back US Dollars.
On the other hand, this is actually an ideal window to take out a loan. Why? It’s fine when people anticipate a likely devaluation. The issue arises when they don't see it coming and max out their credit based on current rates. Right now, one should calculate using an exchange rate of 8.5; leverage that capacity to grab these cheaper installments while the rate is closer to 7.4. That way, even if a devaluation hits, you're prepared.
The worse move is to wait a year or two doing nothing, only to be hit by devaluation and find yourself stuck with much higher monthly payments from the start. Because of inflation and devaluation, the cost of whatever you're financing won't stay the same in US Dollars.

James Hayes6 said:QUESTION: Is the currency clause USATVNA? If it isn't, we need to scrap it immediately!!!

Let's just pay with the US dollar and start buying American products!
The banks are just using this to bleed us dry! The government needs to get rid of the currency clause once and for all.

For someone who claims to love America so deeply, you seem to have a pretty shaky grasp on basic grammar.
Could we maybe dial back the excessive use of capital letters?

Quincy:

On the flip side, this is actually the perfect window to take out a loan. Why? It’s not an issue if people anticipate a devaluation. The danger arises when they're caught off guard and max out their credit capacity just as things shift. Right now, you should run the numbers based on an exchange rate of 8.5. If you can leverage that to grab these cheaper installments (priced at 7.4), you’re covered even if a devaluation hits. The worse move is sitting on your hands for a year or two and doing nothing. Once the devaluation happens, you'll be forced into loans with much higher monthly payments. Because of the currency shift, the prices of everything bought on long-term credit definitely won't stay the same (in Dollars).

Ugh, brilliant logic there. (Pardon my French)
So, the exchange rate will magically hit exactly 8.5 in precisely two years and just stop right there, exactly how ice-man imagined it, right?

There is never a "perfect" time for a loan, especially when initial interest rates are this high.
In my view, if someone is dead set on taking out credit, they should either wait for fixed-rate Dollar loans to become available (we're all still waiting for Godot, though maybe it'll show up since we aren't adopting the Euro as fast as people think) or wait for interest rates to drop and opt for something with a currency clause on a shorter term (assuming Dollar-only options don't exist).

Michelle Williams6 said:I don't quite grasp the opposition to the currency clause state. Ultimately, people took out loans in a specific currency. It stands to reason they should repay them in that same currency. We all had the option to borrow in US Dollars back then, but it didn't suit us because the interest rates were too high. So, we opted for foreign currency instead. It's simple logic... You borrow Swiss Francs, you pay back Swiss Francs. You borrow US Dollars, you pay back US Dollars.
On the other hand, this is actually an ideal window to take out a loan. Why? It’s fine when people anticipate a likely devaluation. The issue arises when they don't see it coming and max out their credit based on current rates. Right now, one should calculate using an exchange rate of 8.5; leverage that capacity to grab these cheaper installments while the rate is closer to 7.4. That way, even if a devaluation hits, you're prepared.
The worse move is to wait a year or two doing nothing, only to be hit by devaluation and find yourself stuck with much higher monthly payments from the start. Because of inflation and devaluation, the cost of whatever you're financing won't stay the same in US Dollars.

Nobody here is getting paid in foreign currency. Everything is handled in Dollars.
So where are all these massive Swiss Franc loans hiding?
If you check the Federal Reserve bulletins, how much of those loans are actually covered by deposits in our banks, and what currencies are those deposits even held in?

neondriver5 said:Quincy:

On the flip side, this is actually the perfect window to take out a loan. Why? It’s not an issue if people anticipate a devaluation. The danger arises when they're caught off guard and max out their credit capacity just as things shift. Right now, you should run the numbers based on an exchange rate of 8.5. If you can leverage that to grab these cheaper installments (priced at 7.4), you’re covered even if a devaluation hits. The worse move is sitting on your hands for a year or two and doing nothing. Once the devaluation happens, you'll be forced into loans with much higher monthly payments. Because of the currency shift, the prices of everything bought on long-term credit definitely won't stay the same (in Dollars).

Ugh, brilliant logic there. (Pardon my French)
So, the exchange rate will magically hit exactly 8.5 in precisely two years and just stop right there, exactly how ice-man imagined it, right?

There is never a "perfect" time for a loan, especially when initial interest rates are this high.
In my view, if someone is dead set on taking out credit, they should either wait for fixed-rate Dollar loans to become available (we're all still waiting for Godot, though maybe it'll show up since we aren't adopting the Euro as fast as people think) or wait for interest rates to drop and opt for something with a currency clause on a shorter term (assuming Dollar-only options don't exist).

No one can say with absolute certainty what the exchange rate will be in two years, but you can certainly try to make an educated guess based on current trends.

Given how things currently stand and considering the way they are trying to solve present issues through monetization (essentially printing money), we can reasonably assume the value of the Euro will be lower in two years than it is today; as for by how much? I honestly don't know.
The most recent event supporting this was last week's buyout of bonds from the most distressed European Union nations (like Portugal or Ireland); back then, 9 billion in bonds were offered for as much as 45 billion Euro in cash. This suggests that while the economy is struggling, there is plenty of liquidity floating around. When there is an abundance of something without any real underlying support, like actual economic growth, its value inevitably falls.

Interest rates are where they are because the market price of money here in America is higher than it would be in, say, Austria; the sovereign risk is higher, legal certainty is somewhat lacking, and so on. But the primary reason for such high rates is the price at which our own government voluntarily agrees to borrow from banks, which is currently hovering around 7%.
The government has always been the ultimate debtor, and it always will be, so a citizen—who is potentially a much riskier borrower in the eyes of a bank—can probably only expect interest rates that are even higher than what the government is currently paying.

p.s.
Starting next year, JPMorgan Chase will be offering certain Dollar-based loans without a currency clause up to $30,000, subject to specific conditions.

We can talk about the Dollar another time.😁

Michelle Williams6 said:I don't quite grasp the opposition to the currency clause state. Ultimately, people took out loans in a specific currency. It stands to reason they should repay them in that same currency. We all had the option to borrow in US Dollars back then, but it didn't suit us because the interest rates were too high. So, we opted for foreign currency instead. It's simple logic... You borrow Swiss Francs, you pay back Swiss Francs. You borrow US Dollars, you pay back US Dollars.
On the other hand, this is actually an ideal window to take out a loan. Why? It’s fine when people anticipate a likely devaluation. The issue arises when they don't see it coming and max out their credit based on current rates. Right now, one should calculate using an exchange rate of 8.5; leverage that capacity to grab these cheaper installments while the rate is closer to 7.4. That way, even if a devaluation hits, you're prepared.
The worse move is to wait a year or two doing nothing, only to be hit by devaluation and find yourself stuck with much higher monthly payments from the start. Because of inflation and devaluation, the cost of whatever you're financing won't stay the same in US Dollars.

For me, getting a dollar-based loan wasn't even an option. It was either Euros, Swiss francs, or nothing at all. 🙂

I mean, most people have already pointed this out, so sure, I guess I'll just wander around aimlessly until the USD-denominated loans finally show up... though if folks had just kept their savings tucked away in some local credit union back in the day—you know, when those places actually offered decent dollar-based lending—we’d probably be looking at a much higher volume of these types of loans right now...

The banks shouldn't have even broken a sweat setting all those rigid conditions in the first place, because let's be honest, there were plenty of people who didn't care about the fine print and were perfectly willing to sign whatever was put in front of them
if more people had actually stood their ground and said "no thanks," the banks would have been forced to pivot and actually cater to the public... though, of course, you can't ignore how much the federal government plays into this too, since they don't really give a damn about what individual interest rates look like as long as they get their cut, which is exactly why we ended up seeing those rates spike for regular Americans

Banks aren't exactly gonna change their ways here. I mean, do you even realize how much debt the federal government is taking on lately? Maybe do a little digging into that, and you'll see that banks can live pretty damn well just off the government's dime.

actually reading what’s right in front of you with some actual comprehension, especially that final sentence 😉

Can you explain why banks would even bother catering to regular people by dropping interest rates to, say, 4.5%, when they could just turn around and lend money to the government at 7%? Maybe even higher soon, I guess.

Richard Lewis16 said:I mean, most people have already pointed this out, so sure, I guess I'll just wander around aimlessly until the USD-denominated loans finally show up... though if folks had just kept their savings tucked away in some local credit union back in the day—you know, when those places actually offered decent dollar-based lending—we’d probably be looking at a much higher volume of these types of loans right now...

The banks shouldn't have even broken a sweat setting all those rigid conditions in the first place, because let's be honest, there were plenty of people who didn't care about the fine print and were perfectly willing to sign whatever was put in front of them
if more people had actually stood their ground and said "no thanks," the banks would have been forced to pivot and actually cater to the public... though, of course, you can't ignore how much the federal government plays into this too, since they don't really give a damn about what individual interest rates look like as long as they get their cut, which is exactly why we ended up seeing those rates spike for regular Americans

😉 come on, it's pretty obvious if you just look at it