Matthew Solorzano Unit 4 Lesson 3 Math notes cont'd

# Matthew Solorzano Unit 4 Lesson 3 Math notes cont'd - Unit...

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You may have done something similar to this as a child. If a friend wanted to borrow a doll or a video game, you'd make them give you something they valued as "security." You'd hold that item until your doll or game was returned. When they were finished playing with your toy, you'd give them back their stuff and that would be it. Banks follow the same general procedure, except that they charge you interest on the loan while keeping ownership of the property. In an upcoming lesson, you will learn at length about secured versus unsecured debt. For now, the important thing to realize is that secured debt is better than credit card (unsecured) debt. I'm Feeling Very Insecure But why is this so? "Why is this so-called secured debt so much better than credit card debt? I'm being charged interest just the same!" There are two reasons: First, the interest rate on a secured loan is lower than a credit card's interest rate. Remember, the bank has an asset (your car or house), and the asset means the bank is taking less of a risk. For instance, if you rack up \$10,000.00 in credit card debt and you default, the credit card company loses \$10,000.00. They don't like to lose money, so they charge a high interest rate to cover that risk. But if you take out a car loan for \$10,000.00 and you default, the bank will hire a repossessor to find your car. They will then sell it at an auction and hopefully get back most of the loan. This means that the bank has only the difference between the loan and the auction value
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