Two good friends from childhood Jack and Paul met after years in the bar
theybegan to talk about their life and when it came to finances it turned out that
Paul has a full-time job and lives from paycheck to paycheck and Jack earns good money from his own business
Paul needed money and he decided to ask Jack
for help the first situation Paul said to Jack listen pal I have a great
business idea I work in a motorcycle shop and I noticed that parts are very
expensive many of them I could produce and sell a lot cheaper if I had the
right machine the product at the same time would not lose quality
unfortunately I cannot afford such a machine because I don't have any savings
but I calculated that my business would yield me about $1,000 more than a
full-time job please lend me $3,000 so I can buy this equipment
Jack said: Paul I don't know because even though your business looks promising something could
go wrong and then I would lose my $3,000 Paul proposed a different solution okay
let's agree that if the business succeeds I will give you about 10% more
than I borrowed from you it will be your reward for your risk
should Jack grant such an investment loan? Of course Jack must first know Paul's business plan
because the decision is only up to him he's a man who has capital because he
has made savings if he assess that Paul's plan is good then the loan should
be granted and the capital will bring benefits to both of them if he finds out
that that plan is bad because Paul would like for example to make the parts of
wood instead of metal he should refuse because his capital would be wasted
should we blaim Jack that he wants to get some interest from the loan?
No, because it is payment for at least two things. Firstly the risk of losing money
which after all Jack did not get from anyone for free but earned it with his
hard work. Secondly for the creation of new opportunities for Paul which
otherwise he never have had. Jack would benefit from
the loan only when Paul would benefit from it. If Paul fails he will just not
have a possibility to repay it the investment loan is a very important
factor in economic development as it allows people to establish a business
much faster than they would if they would have to accumulate capital for
many years. Now the second situation. Paul said to Jack listen pal if you are so
successful in life lend me please $3,000 because my wife
wants us to go to the Italy for vacation. I will pay you back with
interests. Jack thought for a moment and said: then why won't you use your savings
I have no savings I have so many expenses, tickets to cinema, a dinner out
or a new telly I cannot save anything - answered Paul. Then how do you plan to
pay me back the money with interest if you have not set aside any money for so
many years - asked Jack. Look it's not gonna be a problem
after return I will be relaxed and tanned that would be peace and quiet at
home as my wife will be satisfied I will then be able to take overtime and repay you
Should Jack agree to such a consumer loan?
Of course not. He should not agree for both his and Paul's sake if over the
years Paul was not able to save any money there is a good chance that he
will not do it in a future and then Jack's money that could be used in a
productive manner would be wasted Paul thinks that after the vacation he
will repay his obligations but how does he intend to do it after all he will not
increase his earnings or productivity for him it will be better if he first
put some money aside and spend it later as in this situation he would not have
to pay the interest which he offered himself. The loan for consumption means
that Paul borrows money from his future prosperity and with interest
he lives more comfortably now at the expense of belt-tightening in the future
and as everyone knows it's easy to get used to luxury much harder thing to do
is to get back the luxuries to the previous state
therefore human nature itself shows that it's better to save first and spend
later. The loan is beneficial for both sides when it's used to increase
productivity such loan is also good for the economic growth consumer loans do
not increase productivity and are a burden for people who take it nowadays
a consumer loan which is very hard to avoid is a mortgage I dedicate a few
words on that issue that you can read at econclips.com. If you don't want to
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