This type of finance is hardly talked about because it benefits pretty much every party except the consumer. Think about it. The businesses who raise their costs are happy. They get to charge more for the same quality of service. The banks who make the loans are happy. They get to collect interest while their loans are paid back (and bailed out when everyone defaults). Even the consumer is happy, at least for a short period, but the consumers who don't use loans are not happy.
Real Estate Market Example
Allow me to express my point with the involvement of a home purchase and explain who is benefiting:
Parties involved
- Seller - The seller is benefiting by home loans because the value of his house went up the past few years while loans were being given out. Because it was so easy for people to get a loan that meant that virtually anyone could "buy" a home. And because everyone could buy a home it made the demand in real estate very high. And everyone knows when there is a high demand on a product the price usually goes up. And this is precisely what happened with real estate. Home prices skyrocketed because the demand was so high because so many people were able to get loans to purchase homes. So the seller definitely benefited because they would make money on the appreciation of their home.
- Bank - The bank benefited greatly too because they were able to collect the interest payments on their loans. And that is how banks make money. They loan out money and collect interest. A lot of the times this money isn't even in the bank's possession, but that's okay, they loan it anyway. After all, the banks make even more money if they are able to make large amounts of interest with low amounts of capital.
- Buyer - Now there are really two types of buyers here so we will look at each one in detail here:
- Illegitimate Buyer - The illegitimate buyer would be somebody who can't afford the home because they don't make enough money. This would be somebody who doesn't really have any savings and has no business trying to buy a home. In the case of easy loans, however, this type of buyer comes out ahead as well - at least in the short term. They are able to easily buy a home that they otherwise shouldn't be buying and they too come out ahead in this regard. Needless to say they will be faced with loads of interest and would have paid a premium for the home as all the other illegitimate buyers using loans would have forced the prices up.
- Legitimate Buyer - The legitimate buyer is somebody who lives within their means, has a savings and is able to afford the home they purchase. They are able to easily handle a 20-50% down payment and are making a decent amount of money. This type of buyer is the one who loses in an easy loans fiasco. This is the type of person who gets faced with a loan that they hardly need and a huge home price that they shouldn't have to pay. A home that they could buy cash for $50,000 may be artificially inflated to $300,000 because of all the illegitimate buyers in the market getting loans they shouldn't be getting. As more people get homes they can't afford with loans they can't pay back the prices rise because to the buyer it doesn't matter if the home is $100,000 or $1,000,000. It's a loan. They don't have to pay anything more or less right now. They live in the moment and don't look to what the future holds. Everyone else is doing it, what have they got to lose? So they jump in and participate in the bubble that loans in the real estate market create.
Result
So as you can see from this example the prices in the market will continue to rise as more people are able to now buy things they can't afford with money they don't have.
Conclusion
This example can be applied to many markets outside of just real estate. Another industry where this is very common is the college industry. This industry is taking on the exact same type of bubble that real estate has just gone through and loans are a huge piece as to why this is. We need to be very careful when dealing with lending easy money as it usually never seems to benefit anyone but the bank and the seller long term. If you're looking out for these people then it may be a good idea. But if you're looking out for yourself you may want to rethink the idea of an easy loan.