10 Questions
What is credit based on?
A form of trust
Why would a lender extend credit?
Because the lender believes the borrower has the ability and willingness to repay
What is expected of the borrower?
To live up to the trust by repaying the lender
What is the basis of the lender's decision to extend credit?
The lender's assessment of the borrower's ability and willingness to repay
What is the relationship between the lender and the borrower?
A trust relationship
What happens to your future income when you take on debt?
A portion of it is committed to repay debt
What is the effect of debt repayment on your ability to take on additional credit?
It reduces the amount of credit you can take on in the future
What is the relationship between debt repayment and your income?
A larger portion of your income is allocated to debt repayment
Why does debt repayment reduce your ability to take on additional credit?
Because you have less money available to repay additional debt
What is the outcome of committing a portion of your future income to debt repayment?
You have less money available for additional credit
Study Notes
Credit and Trust
- Credit represents a form of trust established between a lender and a borrower.
- The lender's trust in the borrower is based on the borrower's ability and willingness to repay the loan.
- The borrower's ability to repay is a key factor in the lender's decision to extend credit.
- The borrower's willingness to repay is also a crucial factor in the lender's decision to extend credit.
- The borrower is expected to repay the loan, thereby upholding the trust established with the lender.
Taking on Debt
- When you use credit cards, loans, or other forms of credit, you commit a portion of your future income to repay the debt.
- This reduces the amount of money you have available to take on additional credit in the future.
- A larger portion of your income is already allocated to debt repayments, limiting your financial flexibility.
- Debt repayment commitments reduce your future disposable income.
Learn about the concept of credit as a form of trust between a lender and a borrower, and how it is established based on the borrower's ability and willingness to repay.
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