Tag: borrowing

Deleveraging begins according to Fed data

Posted on by Evan in Debt, Personal Finance

Back on September 29th I wrote this post regarding the concept of “deleveraging”.  Over the past few decades American households and corporations were addicted to debt.  We used credit cards, home equity lines of credit, mortgage loans, auto loans, etc. to accelerate our consumption.

However, our unabated use of debt lead us to where we find ourselves today.  In the midst of one of the worst financial crisis’s in our nation’s history.  As a result, the credit spicket has been turned off and consumers are being forced to deleverage their personal balance sheets.

Data supporting this trend was released today when the Federal Reserve reported that consumer borrowing declined last month for the first time in nearly 20 years.  In the long-run this is good news.

Borrowing out of necessity or opportunity

Posted on by Evan in Personal Finance

In his book “Borrow Smart Retire Rich” Todd Ballenger discusses the concept of borrowing money out of opportunity versus necessity and at the same time does a nice job of describing financial arbitrage:

Most of us have borrowed out of necessity for houses, cars, or other purchases.  Let’s say you borrow money from a local bank for your house at 7%, the same bank where you deposit your pay check each month.  When you make a deposit to your checking account, you loan the use and control of your money to the bank for a little interst, say 2%.  The bank as a professinoal creditor lends the use and control of their money back to you at 7%.  The bank earnes a 5% spread lending your money back to you.  You borrowed out of necessity, while the bank provided a loan based on opportunity.