Credit
Created | Updated Feb 10, 2002
Credit is the system by which money is borrowed and lent. It is typically used by those who seek to obtain something that they cannot presently afford, and are willing to pay a little extra for the convenience of getting the object of their desire on a more immediate basis. This is (a) incredibly helpful for those who require the immediate use of more expensive - but highly necessary - items such as cars, houses, collegiate educations, etc., and (b) incredibly profitable for the banks that lend such money to the aforementioned individuals.
The convenience of being able to borrow money on the part of the consumer is countered by the profitability factor for the lenders, who are typically massive financial institutions (who can afford to lend large quantities of money to large quantities of people). The element of profit is generated through interest, usually a percentage to be paid by the borrower in exchange for being able to borrow the money in the first place. Here is how it is supposed to work:
George has $0 currently, but wishes to buy a vehicle for $10,000. He earns $500/week, so his local bank agrees to lend George the $10,000 for his car knowing that he will be able to repay the loan (he has a decent source of income, after all). But George will ultimately repay the bank somewhere around $13,500 or $14,000 ... the extra money being pure profit for the bank. It may seem unfair, but it's really not. 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 his car right away, he'll have to compensate for this immediate desire by paying a large sum of extra money to the bank who lends him the principle sum. The extra bit of money is called “interest.”
Often, however, it tends to work out this way:
Howard, like George, wants a car. He gets it, like George, by borrowing money from a bank. He then does something incredibly foolish at work, which gets him terminated, and causes him to be unable to repay his loan to the bank. The bank takes away Howard's car (this is known as “repossession”), and sells it at an auction for considerably less money than they paid for it. They ultimately loose money, and they're rather angry about it... but they don't sweat it too much, because they made plenty of money off of honest, loan-repaying folks like George. The interest gained from properly repaid loans is more than enough to cover the losses that banks encounter with such people like Howard.
Despite such losses, banks 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. That’s why they’re banks.
The whole system is very complicated indeed, really, and branches off into many different aspects of various money-lending systems. 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.
The convenience of being able to borrow money on the part of the consumer is countered by the profitability factor for the lenders, who are typically massive financial institutions (who can afford to lend large quantities of money to large quantities of people). The element of profit is generated through interest, usually a percentage to be paid by the borrower in exchange for being able to borrow the money in the first place. Here is how it is supposed to work:
George has $0 currently, but wishes to buy a vehicle for $10,000. He earns $500/week, so his local bank agrees to lend George the $10,000 for his car knowing that he will be able to repay the loan (he has a decent source of income, after all). But George will ultimately repay the bank somewhere around $13,500 or $14,000 ... the extra money being pure profit for the bank. It may seem unfair, but it's really not. 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 his car right away, he'll have to compensate for this immediate desire by paying a large sum of extra money to the bank who lends him the principle sum. The extra bit of money is called “interest.”
Often, however, it tends to work out this way:
Howard, like George, wants a car. He gets it, like George, by borrowing money from a bank. He then does something incredibly foolish at work, which gets him terminated, and causes him to be unable to repay his loan to the bank. The bank takes away Howard's car (this is known as “repossession”), and sells it at an auction for considerably less money than they paid for it. They ultimately loose money, and they're rather angry about it... but they don't sweat it too much, because they made plenty of money off of honest, loan-repaying folks like George. The interest gained from properly repaid loans is more than enough to cover the losses that banks encounter with such people like Howard.
Despite such losses, banks 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. That’s why they’re banks.
The whole system is very complicated indeed, really, and branches off into many different aspects of various money-lending systems. 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.
