[MUSIC] In this lecture segment, we will be talking about some of the pros or the advantages and cons or disadvantages of the use of borrowing and consumer credit lines. So in this lecture, we'll be going on or we'll be doing a quick overview of some of these pros and cons related to borrowing and the use of consumer credit lines. And then we also really want to try to understand the personal financial impact of both responsible and irresponsible use of these tools of borrowing and consumer credit lines. So first let's talk about some of the advantages or some of the pros associated with the ability to borrow or use consumer credit. First of all, probably the biggest advantage or pro to being able to borrow money to finance our purchases is that it makes purchases that would otherwise be unfeasible, possible. So while most of us don't have an extra $200,000 lying around to buy a house or an extra $30,000 or $40,000 lying around buy a car. If we have access to loan contracts, we can make those purchases and pay them back overtime. For consumer credit lines specifically, they also offer a lot of additional flexibility. Instead of having to carry cash to cover all of our spending, we can simply just carry a credit card. And the use of a credit account is arguably safer and more secure than carrying a significant amounts of cash. The other nice things that I personally like about using credit accounts is that they do provide electronic documentation now in most cases for all of my spending habits. These are very useful for going back and creating and updating budgets so you can really track your spending overtime and understand the amount of money coming in on the income side. Versus the amount of money going out in terms of your personal spending habits. The other positive thing that goes along with actively using loan contracts or consumer credit lines is that if you use those things responsibly. They do build a positive credit history for yourself over time. So what that does is it allows you access to even better options in terms of borrowing and the use of consumer credit in the future. As long as you're making your payments regularly, you're making at least the minimum payment, and hopefully more and paying your loans back on time. You're going to be improving your credit history, improving your credit score over time and that's only going to make more borrowing and credit options available to you in the future. And typically, at more favorable interest rates and other types of terms. Now let's talk about some of the negatives or some of the cons associated with borrowing money or the use of credit contracts. So specially looking at loan contracts, as well as consumer credit lines, when you borrow money or when you put a purchase on a credit card. You are making a commitment to pay that money back at some point in the future. With a loan contract, there is typically a defined amortization schedule over a specified period of time where you're committing to make a regular payment. Over that term or the life of the loan to pay back the money that you've barrow today. And wherever we commit to making payments back over time, we're always concern with the uncertainty and the future of being able to repay that loan. So while the job that we have now and the level of income that we're currently earning may qualify as for the borrowing that we would like to do. We also want to be concerned about the future in terms of, is that income going to be secured and in place in the future to continue making those payments over the life of the loan that we're committing to. Another disadvantage that should seem very obvious to borrowing is that, it does cost money to borrow. So when we borrow to buy a house, we will end up paying the lender, or the bank, or the financial institution. All of the money back that we have originally borrowed and for that service, they're also going to be charging us interest. So the amount of money that you end up paying the lender back overtime is going to be that initial principal you borrowed plus all the interest expenses associated with that loan overtime. So there is definitely a financial cost of borrowing represented by that interest rate that is associated with the loan or the credit account. Some other disadvantages associated with consumer credit lines is that the accounts and the agreement associated with this accounts can sometimes be extremely confusing or overwhelming. And they can have very high and variable interest rates, so on a loan contract if we select a fix interest rate, we're going to know what that interest rate is going to be moving forward. But a lot of times with credited accounts, if you read the agreement carefully, the potential interest rate that you may pay might be variable. I mean, it could be extremely high, so, the potential interest cost associated with borrowing on consumer credit lines such as credit cards is potentially much higher. The other issue with consumer credit lines that is often brought up is that users of these accounts, while it does provide flexibility, there are a lot of positives associated with them. It does require the user to use the account responsibly, so ultimately, it's up to you to making sure you're spending within your means, making sure that when you commit to a purchase. Whether it be a using a loan contract or using a consumer line of credit that you are able to commit to repaying that money back over time. According to the terms that you've agreed to in that long contract or with that credit card account that you're using. Related to that then one of the big disadvantages to credit is if you do end up using that account irresponsibly, if you spend beyond your means. If you're unable to make some of those payments overtime on time or make the amount of the payment that is required. It can build a negative credit history over time and although it does to you over time in the future is it reduces the options that are available to you in terms of your ability to borrow in the future. Your ability to access additional credit lines in the future as well as the terms associated with those things. So you may be setting yourself up for having to pay even higher interest rates. I'm borrowing in the future or just have borrowing an option that's taken away from you, if you don't use your account responsibly and build that negative credit history overtime. Now let's take a look at an example of that here just to end up the lecture. Here's an example from the US Federal Reserve. We're looking here at a new balance on a credit card account of $3,000. The credit card company has established that the user here must make a minimum payment of $90 and I'm assuming that's a monthly minimum payment that's listed here. And let's take a look at some repayment scenarios here, so towards the bottom of the table. Let's say that we make no additional charges using the card each month and we make only that $90 minimum payment. Now while that's all the credit card company is requiring to pay off that $3,000, it will take you 11 years to pay off the balance at the interest rate outlined for this credit card. In total, you'll end up paying over $4,700 back on that $3,000 so over $1,700 in interest charges over that 11 year period just to pay off that $3,000 balance. However, if we look at a scenario where we increase the monthly payment there, from the minimum of $90, to just $103, so a pretty small increase from the minimum. We can reduce that repayment period to 3 years, and reduce the total money repaid, to just over $3,700 or only about $700 in interest expenses. Saving us over $1,000 in interest expenses in addition to the 8 year difference in the time it takes to repay that $3,000 balance on our credit card today. [MUSIC] [SOUND]
