Friday, March 27, 2009

What Is A Loan?

In all this talk about debt consolidation I have left out one of the most important things to talk about. That thing is: What is a loan?

Now I don't want to offend anyone with this post or assault a beginners intelligence. After all, even children know what a loan is. When a child loans another child a toy they both know that the toy is only temporarily in the possession of the other child. He doesn't own the toy. It isn't his. It is just borrowed.

We all know this definition of "loan."

Since we all have this common understanding it can be shocking to have our understanding of what a loan is, but many people do not really understand what a loan really is. You simply don't see it the way that it should be seen.

To help shake us out of the stupor of thinking we know what a loan is I want to engage in a little exercise where we look at loans from a bunch of different perspectives to get past our childhood understanding of them. We need to see them for what they really are.

A Loan From The Borrower's Perspective
The borrower probably has the worst perspective of anyone involved in the loan process. Greed and the desire for things (or education) that are well outside their means entices them to use money that is not their own.

The thinking generally goes like this:
Hi, my name is Jack and I see something that I want. I want to have 4 years of partying and drinking before I get a real job and become and adult so I am going to go to school. I haven't worked a day in my life and have no skills so I am going to ride the coattails of my dad who is loaded (at least compared to me).

Because he doesn't want me to be a free loader all my life (gosh, what a jerk!) he is making me fork out some of the dough for college too. I don't have any money so I am taking out a loan - whatever that is. I don't really care because I just know I want all the drinking and chicks that I can find at State College University.

I heard that I should read the terms of the loan and find out what the interest rate is but I don't give a rats ass. This loan is my ticket to greatness.
Sure, not everyone who takes out a loan is as oblivious as our friend Jack - but they do fall into the same traps that he does. Let's take a look at them:
  • He is dead set on doing something he can't afford for all the wrong reasons. Jack wants to go to college so he can get drunk and party hard with his friends, not so that he can learn a trade or become a useful member of society. Some buy cars because they are cool or go on vacations to "relax" and take out loans to finance their unnecessary expenditure. It is all the same if you ask me.
  • He is so dead set on it that he isn't doing his due diligence to find out what the heck he is getting himself into. He at least could have figured out what he was doing so he could pick the least deadly of all the poisons he was choosing to drink. He didn't even find out the term of his loan or its APR - both would have helped him out a lot in the long run.
Many people do the same exact thing with tons and tons of different circumstances. They get caught up in the moment of wanting it now so that they fail to look at it from another perspective. They should really take a second and look at it from a lender's point of view.

A Loan From The Lender's Perspective
Lender's love giving out loans. They are like little children on the night before Christmas, waiting eagerly for the bounty of presents and cinnamon sweat rolls. Think about it, who benefits from people buying things they can't afford? Who lines their pockets with interest payments? Who can make hundreds of dollars sleeping on the beach? Lenders - that's who!

Here's an example. A lender is just sitting around with $1000. He doesn't really need that $1000 because if he did he would have used it buy food, or get some clothes, or buy a house. He didn't use that money for it so it must mean that he doesn't need it. And since he doesn't need it he is going to see if he can use that money to make more money.

He lifts his head up and begins scanning the horizon for somebody who might want to use his money more than he does right now. He won't just give it to anyone - I mean they may not pay him back. He sifts through the crowd of people looking for a certain type of individual - a person with income generating potential who want something now that he can't afford.

He gravitates to this type of person like white on rice. He wants to be this persons best buddy in the universe. Do you know why? Because by lending this person money the lender can leech from them their productivity.

The lender sits down with the borrower and they work up some loan papers. They specify loan terms, the interest rate, and any penalties or fees associated with the loan. If the borrower agrees they are obligated to pay the interest on the loan. The interest on the loan is where the lender makes his money and steal the labor of the borrower.

Did the lender work of the interest? No, he simply took on the "risk" of lending the money. The interest is paid for by the labor of the borrower. What do we call a system where someone is obligated to perform work that benefits another? Slavery!

Wealth is then transferred from the borrower into the lenders hands. The decision to buy something that they could not afford has left the borrower paying twice for the same thing - once to the person they paid money to and then once again to the lender in interest.

A Loan From The Lender's Children Perspective
But here is the kicker - the lender is not the only one to benefit from his enslavement of the borrower. His children also benefit.

This works in the following way: The lender already didn't need his $1000, that is why he lent it out at interest. This $1000 is still going to presumably be around lender dies because if he didn't need it now to pay for food or shelter then there is good reason to believe that he will not need that $1000 at another time to pay for food or shelter. It can be considered as wealth.

This wealth, when the lender is good and dead, will then be distributed to his heirs - or taxed by the government - or distributed to charities friendly to the lender. Either way, these people have benefited from the borrower. They are happy because the borrow got into debt!

A Loan From The Borrow's Children Perspective
There are set of individuals who are not happy that the borrower got into debt - the borrower's children! The wealth that the lender was able to accumulate was supposed to be left to them. But their short sighted parents want to party for four years in college or drive a nicer car than they could afford. The wealth that their parents could have been building was siphoned off into the hands of already rich individuals who had the cash to bankroll a lifestyle well outside their parents means.

Kids suffer when parents go into debt. End of story.

Bringing It Back To Debt Consolidation
So what about debt consolidation loans? Where do they fall? Debt consolidation loans are still bleeding away wealth from you, your family, and your children. They can be just as bad as other types of credit in how they take away your productivity and put it in the hands of another. They are still a form of slavery. Debt consolidation loans still suck.

But the question of whether or not you should get one of these debt management tool is a calculated decision that you must make. Will it be less bad than your current situation? Will it fix your immediate cash flow problem? In a perfect world you would never have gotten into the debt in the first place, but since you have you might as well as get out of it as quickly as you possibly can while spending as little money as you can.

This is the single criteria by which to evaluate whether or not you should take out a debt consolidation loan - will it save me money?

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