Advantages and Disadvantages of Using Consumer Credit

calculating the rate of return of equity and debt instruments.
11/09/2019
Organizational Analysis Paper
11/09/2019

Advantages and Disadvantages of Using Consumer Credit

Name

Institution

Abstract

This paper will talk about the risks of debt, the ways in which debts can be used to build wealth, how lenders assess borrowers and the ways in which one can use debts by Tim Clue.

Question 1

I have debts for cars, furniture, and appliances. These determinants of the costs of my debts include the value of the assets. The costs of my debts are $ 75000.By being in debt, a person risks the auctioning of their property and losing their reputation if they are unable to repay. A person can use debt to build wealth by investing in education, real state, and in starting a new

business. Starting a new business will help to repay the debt, and then the borrower will be left with a source of income (Yan., 2013).

Question 2

I am not considered a default risk, and a lender evaluates m according to the following 5Cs.

Character

This refers to the history pf the borrower concerning the repayment of debts. If the borrower has a reasonable debt repayment history, the lender will be more than willing to lend their money. This is because they will have confidence in the borrower that he/she will repay. However, if the borrower has a poor debt repayment record, the lender will not be willing to issue their money for a loan since they are not willing to risk losing it (Moti.,2012).

Capacity

The lender looks at the ability of the borrower to repay the loan before issuing it. They must, first of all, ask the borrower how they are going to refund the money. They have to agree on the amount that the borrower will be paying monthly or after a certain period plus the interest rate.

Capital

The lender must determine whether the borrower has the required capital to start a business before issuing them with a loan (Hawkins.,2000). The borrower also must know the amount of capital required for the startup. Most lenders shy away from giving loans to startups.

Collateral

The lender must know the assets that will be used as collateral security for their money. These are the ones that will be sold if the borrower defaults in payment (Bauer.,0160. The lender cannot risk his money. He /she must be assured of the item that can be sold to recover their money.

Conditions

The borrower has to agree with the terms and conditions of borrowing money of the lender. This will make sure that there will be no disputes when it comes to repayment (Bauer.,2016).

Question 3

The video by Tim Clue about debt is funny in the part where he says that he looked at his debt and said to himself that he could never pay this off. However, t is not funny where he says that it is good to leave a debt to your children. That it is good to leave something that money cannot buy to your children. He says that to manage debts, first, a person has to accept their situation and plan how to repay with time. One should not hate themselves.

 

In conclusion, debts can lead to auctioning if one fails to repay and damage of reputation. Capital, conditions, character, capacity and collateral are the ones used by lenders to assess borrowers.

References

Moti, H.O (2012) Effectiveness of credit management system on loan performance: Empirical evidence from micro-finance sector in Kenya. International journal of business, humanities and technology. 2(6).

Yan,R, Chi, H.M, Koo, S & Baker, J. (2013) System and method of detecting and assessing multiple types of risks related to mortgage lending

Bauer, G.H & Granziera, E. (2016) Monetary policy, private debt and financial stability risks.

Hawkins, J 7 Turner, P. 2000) Managing foreign debt and liquidity risks in emerging economies: An overview.

Ugo, P. (2014) Public debt risks in Italy: Myths, facts and policies.

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