Please answer question 1 What is the goal of banks & other businesses that provi
ID: 2263431 • Letter: P
Question
Please answer question 1
What is the goal of banks & other businesses that provide consumer credit? Like every business, their goal is to make money. And the way they make money is on the interest you pay for their products & services (home loans, auto loans and leases, personal loans, credit cards, student loans, etc.). This, in and of itself, is not a bad thing, but if you don’t understand how this works, then you are their perfect customer. Sadly, we saw above the majority of Americans fall in this category, while they think they are financially savvy. What to be careful of: • Payment-focus: One of the greatest deceptions of the financial industry is to keep consumers focused on monthly payment amounts. This keeps you focused on the short-term and often hides (in plain sight) a more important question – how much is this costing you in total. • Emotional Manipulation: Another great tool of most consumer businesses that helps them make money at your expense is getting consumers to focus on emotional aspects of a purchase. “Life Takes Visa” was a very successful credit card campaign, which focused solely on consumer’s desires for a specific lifestyle – without any focus on financial consequences. • Interest rate – the basic calculation for any time value of money relies heavily on the interest rate or the APR – annual percentage rate. A lower rate leads to lower payments while a higher rate leads to higher payments and more interest. This is one of the key benefits of having good credit – you get better rates. • Loan term – refers to how long your loan is for. The longer the term, the more you will pay. Businesses want you to focus on your monthly payment and the emotionality of your purchase, because then you pay less attention to the length of the loan – and how much you will really end up paying for this new car, home or even dinner at a restaurant. For example, a typical home loan is 30 years, while the difference in initial cost of a home is not so much different for a 20-year loan.
1. What is one good strategy for you to use, to not get swept away by emotion on a big purchase?
Explanation / Answer
1) The best way to prevent emotions clouding your judgment on a big purchase, would be to ask yourself the question
"How much do I NEED this?" as opposed to "How much do I WANT this?"
You should always weigh the benefits of your purchase against the financial burden it will bring with it. Having this hindsight will surely help you rationalize your purchases.
Practically, one must always keep track of their financial goals and must always factor in the long term effects of going into a loan /debt.