Credit Lending

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The fundamentals of credit lending seem pretty straight forward. The bank (lender) provides up front money to the borrower, with the understanding that the borrower will pay this back over time. The monetary incentive for the banks to lend money comes from the interest that they collect on the loan.

In principle, credit lending is a mutually beneficial proposal. The borrower is able to easily get what they want, pretty much as soon as the loan is approved. The loan itself might come in the form of a lump sum, or in the form of a credit card (which is likely the most popular type of credit lending). The financial institution is able to pretty much guarantee a return on their investment through charging an interest rate appropriate to the borrower's perceived ability to repay the loan.

The down side to this, and the fundamental problem with credit lending in general (and specifically, credit cards), is the interest itself. The individual borrower trades immediate gratification for potentially exorbitant long term commitment to repay the loan. The unfortunate consequence, is that the borrower might have another crisis come up, or possibly something else that they might also want to purchase. The existing loan might prohibit them from being able to save for another purchase; the borrower might then rationalize a "wants vs. needs" scenario, and end up eventually opening another credit loan or credit card. This situation can not end well unless loans are paid off as quickly as possible, and the borrower is able to separate needs from wants.

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More on Credit Lending
Credit Lending and borrowing on credit is a win/lose situation, unfortunately. Many debt holders realize this too late, and eventually lose in the long run. Bankruptcy might be the result, or best case scenario they are able to pay the loan off over several years. That $400 TV might end up costing double or even triple that over the life of the loan. It is possible to borrow intelligently, but most people do not. It is suggested to carry no more debt than you are comfortable and able to pay off within a couple of months (to help minimize the overall interest expenditure.).

You can also read some of our other articles on credit lending to find more information about smart borrowing practices.

Credit Cards and Mortgages - Great information comparing some of the details of credit lending in regards to credit cards, and how your credit is used to affect your mortgage rates. A discussion on getting the best mortgage rates, as well as information on saving money on your existing mortgage.

Car Loan and Mortgage Comparison - Car Loans are Mortgages are handled separately by the lending institution, however most mortgage banks are able to also offer car loans at competitive rates. A discussion on some of the different options available with car loans and mortgages.