DRJ blog header 10 2018

Budgeting Essentials Blog

Helping you master the practical essentials of Budgeting, Cash Flow, Accounting and Debt Relief.
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Who does Debt benefit?

Many people use debt because they think that they are the ones that benefit from it. But, that is not really the case. Learn more in this week’s blog.

When you use debt to make a purchase, who is it that benefits?  Is it the buyer?  Is it the seller?  Is it the finance company?  Let’s look at each one to see who really benefits.

The seller benefits from a credit purchase in a number of ways. They make a profit on the sale. Even when you are getting a “deal”, the seller is still making out. When you think you are getting a deal, you are more likely to tell other people about it. That gives the seller free advertising.

They have one less item that they have to sell. They are bringing in cash (even though you are financing it). They get paid right away. Many people look at the payment amount to see if they can “afford” the item they are financing. This allows the seller to suggest higher priced items with longer payback periods. You end up getting more than you were looking for and often more than you need. The seller suggests items with higher profit margins which help them make more money.

The lender also benefits from financing deals. Credit card companies make money multiple ways. First, they charge a fee to the merchant (seller) to process transactions somewhere between 3% & 6%. So they start making money right away. Some also charge the merchant a monthly fee on top of the processing fees. Then they charge interest to the borrower, up to around 24%. So they can make 30% on a transaction. Can you get that kind of return on your money?  This should help you understand why they can afford to have some customers who don’t end up paying.

While credit cards are unsecured debt, bigger ticket items require collateral, a fancy term for ownership. That means that they own the item that is pledged to the lender until the loan is paid off completely. If you take a 30 year mortgage on your home and miss the very last payment, the bank has the RIGHT to take the house. You will have paid as much as double the “sales” price (or more) and still lose the property. You gave the lender that right when you signed the loan papers.

Now let’s look at you. You get the use of the item you borrow money for, but at what cost?  You pay more than list price for what you buy, even when you get a “discount”.  You pay for items for months or even years after you get them. You give up your ownership rights until the loan is paid. Often you owe more on the item than it is worth (think new car).  You don’t have the payment money available for opportunities that come up. Many people don’t even know what they got for the money they are sending to the lender every month.

The lenders and sellers clearly benefit more than you do when you use debt. Remember that before you sign the loan or swipe the card.

Anything you tolerate becomes normal to you. When you stop tolerating debt, you increase your ability to function without it. It will take you some time, but the end is worth it!- Dan Heiland

Scroll down to the comments and tell me if this post has helped you and how it did!

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God Bless your week!

Copyright

© 2019 Dan Heiland 2019 Kat Heil, LLC

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