Posts Tagged ‘loans’

Apparently Debt is the New Cigarettes

Thursday, June 23rd, 2011


(photo credit: paalia)

Now, debt isn’t necessarily a bad thing, okay? But this is a little crazy. For the past 25 years, people in their early and mid-twenties have reported feeling a thrill of maturity and self-confidence when they first started to dig themselves into the debt hole.

Whether the money was going toward education or just going into the “I’ll pay for this pizza later” pile, young adults – especially those in the lowest 25% of income earners – said they experienced greater “self-esteem and perceived mastery” when they began to run up a tab.

Some kinds of debt are better than others. In general, debt that can be considered an investment in something – like a home, or an education that can get you a better job – is a good thing. But debt that gets you nothing but fees, interest rates, and a pizza that has long since been digested and forgotten – i.e., credit card debt – is not good.

The most important factor in determining whether your debt is good or bad is whether you’re able to make payments in full and on time. If you don’t, your credit score will suffer and you’ll find yourself on the road to Massive Debt.

Which, by the time you reach 28 (according to the study), will start to make you feel kind of bad about yourself.

Family Investors? More Like Donors.

Wednesday, March 2nd, 2011

“Experts generally advise entrepreneurs to ask for an amount that their loved ones can afford to never get back, and say the recent recession is in some cases proving this point.

‘The reality is most companies do not succeed,’ says William D. Bygrave, a professor of entrepreneurship at Babson College who co-wrote a 2010 study on the expectations and motivations of informal start-up investors, including family, friends and strangers.

Dr. Bygrave’s findings show that about half of such investors anticipate a positive return on their investment, while the other half expect to lose part or all it. ‘The closer the relationship between an entrepreneur and an investor, the lower the expected return,’ his research concludes.”

What do you think?

If you borrowed money from a family member for a business venture, how likely would you be to pay it back? Would you sign a formal agreement or try to keep the loan “casual?”

A Loan Commitment is…

Monday, November 2nd, 2009

A loan commitment is a promise by a lender to loan a predetermined sum to a borrower on specific terms.

Repossession is…

Tuesday, October 20th, 2009

Repossession is when a creditor takes back whatever it is you bought with their loaned money because you didn’t make payments (defaulted) on your loan. If you get a loan to buy a car and don’t make the payments, the financing company can take your car without going to court or even telling you – at least until you pay your bill. And if you default on mortgage payments, the bank can repossess your house!

What happens if you don’t pay back a loan?

Monday, August 10th, 2009

Normally, people who can’t pay their loans declare bankruptcy, which is basically an acknowledgment that you are incapable of recovering from your debt. If you’re really in over your head, sometimes bankruptcy can be the only option, but it’s generally a last resort – your debts are forgiven, but your credit score takes a massive hit. And with a low credit score, it’ll be a lot harder for you to get loans in the future.

But suppose you don’t declare bankruptcy and just soldier on without repaying what you owe. What happens then? At first, you probably just continue “rolling-over” the loan and paying more and more interest on the item you purchased.  If you took out a loan for a tangible item, the lender usually comes to repossess it. For example, if you’ve leased a car and you stop paying the lease, the company that loaned you the car will just take it back.

But if there’s no way for the lender to repossess the loan (if the loan was money, for example), the company has to take the matter to court. The lender can decide either to sue you (which basically forces you to either pay back the loan, declare bankruptcy, or be convicted in court), or to garnish your wages, which means that a judge decides to award a certain percentage of your paycheck to your creditor until the loan is repaid.

Once you get into serious debt, it’s very difficult to get out unscathed, so it’s better to avoid that decline altogether; you’ll just get forced into one of the above positions, and all of them have unpleasant consequences.

Asset-Based Financing is…

Wednesday, August 5th, 2009

Asset-based financing is a method of raising money by taking out loans to pay for a project or business and using the assets involved in that project or business as collateral and/or to generate return. For example, if your business manufactures cars, you can take out loans to pay for the necessary materials and costs of production, using the car factory as collateral. After you sell the cars you’ve produced, you would use the profits to pay back your loans and pocket the remainder.

A Pay-Down is…

Wednesday, August 5th, 2009

A pay-down is a partial payment of a debt. For example, if you make monthly payments on a new car, each one of those payments is a pay-down.

A Pledge is…

Monday, August 3rd, 2009

A pledge is an asset or assets given to a lender as collateral (that is, the lender basically holds the pledge hostage until you pay back your loan, and he gets to keep it if you don’t).

A pledge is also a promise to donate money to a charity or other fundraising cause (so if you “pledge” $5,000, you haven’t actually given it, but you’ve promised to do so).

What is the difference between a microloan and a regular loan?

Monday, March 23rd, 2009

Normally, banks make loans to customers who need a large sum of money immediately to purchase a house or a car or to start a business. These customers are attractive to the banks because they promise to repay their loans with a significant amount of interest.

A microloan is a very small loan for individuals or entrepreneurs – often those living in poverty – who aren’t as attractive to traditional large financial institutions. Banks decide whether they want to lend money based on how likely they are to make a profit by doing so. Things they consider to make their decision are the size of the loan, interest rate charged, and the borrower’s credit quality (or the risk involved in lending to a specific person).

Microloans are available in the U.S., but they’re even more popular in developing nations with a high poverty rate. The average size of a microloan secured through the U.S. Small Business Administration is $13,000. The size of an average microloan worldwide is $1,026. To make up for the higher risk involved in lending to people who may not be able to pay back their loan, microloans often have a much higher interest rate than traditional loans. Interest rates on commercial loans in the U.S. are typically around 7-8%, but they can be more than 20% on micro-loans!

Still, microloans are important to the development of a struggling economy. They are sometimes the only opportunity a poor entrepreneur has to raise enough money to start up a potentially successful business.