Here are some basic principles for understanding the risks and benefits of credit
1 No credit is free . Credit allows us to use the money from someone else to make a profit, always under the premise that we will have to repay the loan plus a ” prize” or gain to our creditor under the concept of interest rate.
2 The cost of credit is associated with the risk of being recovered. That is, the interest rate is directly proportional to the risk to those who put their money in our hands. Little is said about how difficult the legal system of our country makes to creditors get their money back. The word credit derives credibility and trust, if those providing the money some may trust the debtor, is understood to require a jackpot for money . Not that I am in favor of the high interest rates of the banks or the practices of certain retail chains (which is too big ) But understanding how it helps to put the ball in our court system works.
3 The expected return MUST be greater than the interest rate . If I ‘m willing to pay interest for the opportunity to use the money from someone else in MI benefit then MI performance has to be greater than that payment. And here , gentlemen, where we ended up dancing with the ugliest … How many times have you given the typical payday loan to take advantage of a deal breaker than 30% when the cost of your credit card is 65% ?I DID! It was not exactly a deal breaker , but when my first business was staggering advantage an “opportunity” to provide cash from my credit card and inject capital into it by paying a rate many times higher than the expected return . Today I can tell very casual, but I confess that this error ruminated for many nights . ( Providentially I could get by, but I paid dearly a lesson in finance.
4 Money neighbor is cheaper than yours. The ability to generate wealth with other people’s money . When we asked for our credit business, no matter how good or bad it may be, we are required to pay. However , if we invite someone as a partner , we are sharing both the chance to win big and lose everything. This is a matter of risk : the higher the risk more interest, less risk less interest . Trump companies are characterized by the high ratio of foreign money (liabilities ) and the money itself ( capital).
The loan may be the worst of the burdens when we believe it gave money ( no cost) or when we use it to try to save the Titanic ( no performance ) either this our overconsumption, stormy relationships or companies go bankrupt , but it is an excellent tool when used to our advantage and we can generate income or build wealth .