Credit Content from the guide to life, the universe and everything


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Credit is a term that is used to describe both a system by which money is lent out, and a system to describe that money is being borrowed. The system and the money it lends are typically used by those who seek to obtain something that they cannot currently afford, to facilitate acquiring the object of their desire immediately. The lenders are typically massive financial institutions who can afford to lend out large quantities of money to large numbers of people. Such a system is:

  • Incredibly helpful for those who require the immediate use of expensive, but highly necessary, items such as cars, houses, collegiate educations, and so on.

  • Incredibly profitable for the financial institutions1 that lend the money to the aforementioned individuals.

For the consumer, the convenience of being able to borrow money to meet immediate needs, is countered by lenders profiting in having it paid back. The financial institutions' profit is generated through interest, usually a percentage of the outstanding money on the loan, to be paid by the borrower in exchange for being able to pay the money back in instalments, over the projected life of the repayment.

Here is how it is supposed to work:

George has $0 currently, but wishes to buy a vehicle for $10,000. He earns $500 per week, so his local bank agrees to lend George $10,000 to buy his car knowing that he will be able to repay the loan, based on his steady income. With interest being paid on the outstanding money on the loan, however, George will ultimately repay the bank something like $13,500 or $14,0002, the extra money being pure profit for the bank. It may seem unfair, but it's not really. The bank doesn't have to lend anything to George. As far as they're concerned, he can just walk to work. So, if George wants to buy a car right away, he'll have to compensate for his immediate desire by paying an extra sum of money to the bank who lends him the principal sum.

Sometimes, however, the loan process tends to work out another way:

Howard, like George, wants to buy a car. He gets it, like George, by borrowing money from a bank. He then does something incredibly foolish at work, and his contract is terminated. Because he has lost his job, he is unable to repay the loan to the bank. The bank then takes away Howard's car3, and sells it at auction for considerably less money than the initial loan sum. They ultimately lose money, but because they are concurrently making plenty of money out of honest, loan-repaying folks like George, they don't need to worry about that too much. The interest gained from properly repaid loans is more than enough to cover the losses that banks encounter with people such as Howard.

Even considering such losses, banks and other lending institutions are institutions of massive power and financial resources. As providers of credit, they carefully balance what they lend and what they receive, to ensure maximum profitability and efficiency in their financial affairs.

The whole system is complicated, and many different aspects of various money-lending systems can be detailed. But one thing always remains the same: though credit allows you to get what you want right away, the bank always comes out ahead in the end.

1Typically banks.2The amount of money actually 'paid back' depends on the prevailing interest rate over the period of repayment.3This is known as 'repossession'.

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