In the past few weeks I have learned about loans and their benefits for both the saver and the borrower and the negative qualities of loans. There was also the major difference in the type of loan as well, because the type of loan matters as well as the rate, and sometimes the rate even depends on the type of loan.
Opportunity cost is one of four major factors when it comes to finding the loan rate, though not the largest of the factors. This factor is the cost of spending on something for the saver/lender to lend the money. If you don’t get that, it means that when you put the money in the bank for the bank to lend, you give up the opportunity to spend the now-lent money on some want or need.
The second one is the Loan Arrangement cost for the papers and bank stamps for a loan. Though this one doesn’t seem like a part of the rate, you may get a higher interest rate the more expensive the cost of setting up loans and the borrowers’ credit scores.
The largest factor is Default Risk, which is in turn affected by credit scores. There are two types of loans, collateral and unsecured loans. Collateral (secured) loans are loans that are lent for some specific object that the bank can take (repossess) if you don’t pay back the loan in a specific amount of time. The interest for the loan depends on how often and quickly you pay off debts. The faster you pay the and the more often you do this you gain more credit score, or as I call it “the Trustworthy Score”. If you have a higher score, like 810 (my mom) the less interest you can pay and sometimes the bank will give you a 6-month interest-free pay time. My mom uses this and gains even more credit score to add on and has worked for seventeen years to get the score. Unsecured loans are for disposable items like a can of juice (A public school incident – I lent a kid a can of juice on terms that he would pay me back the dollar I spent on it. He didn’t, and I lost the dollar I basically gave him because he backed out of the deal) and if someone backed out of an unsecure loan the bank has a company harass them until they pay (my mom calls it “puts it up for collections”) and then their credit score drops.
And last but not least, the reduction of buying power by inflation. This part is bad for the saver because with the current inflation every minute their money is in the bank it’s worth a little less because it’s being devalued by the government printing money. This also means that when a borrower repays a debt, he repays less buying power than he was actually lent because the same amount of money now has a lesser value. This is why loans grow when inflation rises and savers lose money and why we bought silver.