Importance of debt, and how it fuels The Market!
Most of us consider debts to be anything we buy or take on credit, because we can’t pay for the purchase in full!
If you have any better definition than this, then your comments are highly appreciated in expanding our knowledge bank.
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The topic we are about to break down is a bit off-beat, based on what today’s consumers demand!
They want to know,
Why debs are important for a country’s economy to serve well?
What is the constant energy that keeps on pushing the debt industry further?
Who are benefited from the petty consumer debts, that nearly all the people of our nation carry!?
And, how do big financial institutions and banks make money from debts?!
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And, if possible, do your own little research on primary market and secondary market to understand the concepts, discussed here, with more lucidity.
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Glossary of Terms used in this article:
- The Market: The total financial market in general.
- Consumers: comprising of the common population
- Investors: Typically players in the secondary market, who buy and sell assets.
- Floating Asset: An asset that exchanges ownership from time to time. Also refers to assets which are ‘current’ and has a power of easy liquidation.
Do you know, what’s “The Market”!?
What are its divisions? And, how debts function in them?
In its most simplified sense, And, the ‘different’ types of transactions done, build up the ‘different’ market types. Say, the stock market, physical market, online market, crypto market, real estate market, or even the local fish market!!!!
And, believe it or not, nearly all markets are by products of debts. Without debt, that is borrowing and lending of assets, no business can flourish!
We are not indicating only one single stock, a $100 bill, a single car, a single mortgage loan, or for instance a single fish! We are talking about trillion dollar transactions!!
Running big businesses require big amounts of wealth inputs and investments. No single man can expect to do that wealth stacking alone. It will sound as if he is GOD! Even if he does, that would only benefit him, and not the society as a whole!
Therefore investors come from different places with different units of wealth to form a fund for establishing a prosperous business plan! The moment such a fund gets created and implemented, all the investors start to gain profit from it.
Such a wonderful thing!
But the question is, from where did all the investors get their money??!!
This is when the thunder strikes!
The old tale goes, serving in unison is serving to God. But, no one ever told that men get united, only when there’s a profitable purpose!
Whenever there’s an opportunity of several people getting benefitted at the same time, like-minded investors join hands to form a debt chain.
Like purchasing shares of a growing company, buying promising mortgage securities, and hooking onto third party debts (like a credit card debt sold off to third party collectors).
So, we can pretty well say, that one man takes ‘something’ on debt from someone who got that ‘something’ from someone else on debt, who in turn got that ‘something’ from someone else on debt, who got that ‘something’ from someone else on debt, who…………………………
And, the debt chain is created!
It won’t be a surprise to see, that in the end, this ‘something’ is owned by nobody, yet so many people are reaping benefits.
It is done for the make benefit of the society, to see that no person is left out, because of ill finances.
That’s where the advantage and purpose of debt lies!
But, it doesn’t always have to be an infinite process, as somewhere down the line, someone might actually buy that ‘something’ outright, and thereby finally quench the money shortage of all the investors tied to the chain.
In finance, there are two broad categories of market, based on the participants and the asset types involved in transactions:
The deals, contracts and transactions among banks, credit unions, investors, corporations, and all, are very much different than a transaction between you (a consumer) and a bank, or you and Amazon, or you and CostCo, and so on!
The market where consumers, or companies, or even banks indulge in the ‘first time exchange’ of an asset or debt, is called the
Whereas the market where investors and financial institutions set foot to buy and sell ‘already transacted’ assets or debts, is called the
To understand why players in the secondary market instigate the ‘consumers of the primary market’ to take out debts, we have to know what goes on in the secondary market, first.
The best way to do so, is to draw the example of,
The Secondary Mortgage Market:
Mortgages are security backed loans that are issued for real estate properties or homes.
Being a general consumer you would go to a bank, to take out a mortgage loan for buying your sweet home. The bank is ready to give you the loan and you will be happy and content.
But, from where is the bank getting money to issue so many high valued mortgage loans, as you are not the only consumer!?
The real game is taking place in the secondary market, or the secondary mortgage market. Investors out there buy bulk of such loans backed by securities (your home is an asset, and a mortgage is issued keeping that a security).
Assuming that you are taking out a mortgage loan of $10 value. Give me a call by the way, if you can find a $10 house!!!!).
You will be doing the payments in installments to the bank. This is what the Primary Market looks like.
Now, investors can in the meantime approach the bank and give a proposal that they will buy ten $10 mortgages. The bank will be happy and might sell 10 houses to the investor for a total of $90.
The investor will in turn make the payments on installments, and will also pay interests.
But, his payment will be large as he has to pay $90. Whereas from the primary market the bank will receive a much lower payment each month, as a consumer only has $10 to pay off. The bank therefore gets a chance to earn more profit in a much shorter time span.
Now, don't think that the transaction is stopped at one investor only. The investor who bought the loan bulk from the bank, will sell it off to another investor for a better price. Things will keep on going like this, where in the end, the consumer in primary market buys the house outright. Once the house gets owned in the primary market, it exits the secondary market. But, here’s one thing. More the consumer builds equity overtime in the house, it’s value will decrease in the secondary market! Figure out the math yourself….that's a brain teaser for you!!
Coming back to the point, as of why secondary market tickles general consumers to have debts in the primary market!
From the example of the secondary mortgage market, we get to see that it is the consumer who’s been the main resource of wealth when the house was a ‘floating asset’ in the market.
The lenders and investors might switch hands, but whoever owns the house title, gets payment from the consumer! Hence, if a consumer never bought the house in the first place, then it couldn’t have been so easily played and exchanged in the secondary market!
How normal “consumer debts” fuel the financial market?
By consumer debts we usually mean widespread unsecured debts, which include credit card debt, personal loans, payday loans, and anything that does not have an asset at its back!
These debts usually gain money from the big interest rates, that they carry. For these debts, the ‘secondary market’ works in a different way than it works for secured debts (like the secondary mortgage market).
Here, the original lender sells off a debt to third party collectors, who will be buying it for a much lesser amount, than the original amount!
Then they will pull back the original amount to you, which will be a huge profit for them. However, many risky investors do invest in Credit card companies, but this is an entirely separate topic, which we can discuss some other day.
Keep coming for more financial tips and tricks, and educate yourself at our DebtCC Blogs. But, before you go on and click that link.. .here are a few more things to understand.
How banks make money from credit card balance transfers:
If you’ve been wrestling debts for some time, then you have some idea about credit card balance transfer.
Here, you take out a new card and transfer all your existing credit card balances. Many banks and financial institutions will get you pre approved for balance transfer cards. Because, once you make the transfer, the new bank will purchase your debt from the old bank, for an amount less than what you originally owe.
Now, you will be making payments to the new bank.
This bank can again sell it off to another bank, if you are not able to pay off the debt. There could be a possibility that you can never pay off that debt, and spend your time shifting balances from one bank to another.
This is the reason why we ask you to plan out a good debt settlement process, with a good settlement company. Why feed so many people on your debts? If other people can buy your debts at lump sum, so can you pay them off in lump sum.
So, where are we standing at the end of this big debt game?
To be very accurate, we consumers are fueling this whole debt industry and the financial market. Without us, no assets can float, or carry the guarantee of profit and income.
If no one buys a house with a mortgage loan in the primary market, then this asset won’t get exchanged between investors and banks in the secondary market!
Remember, a debt is pushed by another debt, and mapping the whole network of ownership of a specific asset in the financial market, is a very tiring task! But, we should be proud that we are a part of that network.
All of us should take debts positively, utilize them for our own benefits, keep on doing the payments on time, and keep the cycle flowing.
If you have understood whatever’s being written on this page, then we at Debt Consolidation Care, will be highly satisfied. It is our job to assist you with all financial queries of yours.
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