Thursday, January 5, 2012

Lending Institutions Won’t Suffer the Loss of Those Who Don’t Pay

Think of this – You are in the financial business.  Because of your strength you borrow money at 1-2% and you can lend it out at 25%.  That is one hell of a deal.

And because you have such a spread between what you pay for money and what you charge for it, you can take a lot of chances lending to those who ten years ago were called poor credit risks and therefore were not able to borrow money.

But now with no restrictions on what the credit card company charges, the company is able to lend anybody and everybody nearly any amount they want knowing that even if many people don’t pay, the institutions will still be profitable because their losses will be absorbed by those who do pay but are paying a 25% interest on the items they bought.

What is the end result of this financial scenario?  The lending institutions won’t suffer the loss of those who don’t pay.  Those who do pay will also pick up the tab for those who don’t pay.

(Week #49 on Twitter)

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