Question

Do you think it is better for low wealth consumers to have access to credit at a high cost or no credit at all? Is the banking system equitable?

Answer 1

Credit is a part of financial power. It helps to get the things we need , like a loan for a car or a credit card, based on our promise to pay later.

The main demerit of using credit is the cost to consumers who fail to pay off their entire balances every month and continue to accrue additional interest charges from month to month.

The five Cs of credit is a system used by lenders to gauge the creditworthiness of potential borrowers. The system weighs five characteristics of the borrower and conditions of the loan, attempting to estimate the chance of default and, consequently, the risk of a financial loss for the lender. The five Cs of credit are character, capacity, capital, collateral, and conditions.

he Federal Reserve System supervises and regulates a wide range of financial institutions and activitiesThe Federal Reserve works in concurrence with other federal and state authorities to ensure that financial institutions safely manage their operations and provide fair and equitable services to consumers.

Just like any other business, a bank earns money so that it can run its operations and provide services. First, customers deposit their money in a bank account. The bank provides safe storage and pays interest on customers’ deposits. The bank can lend the rest to qualified borrowers. Borrowers are charged interest on the loan a bank’s primary source of income.

Is the banking system equitable

Borrowers with bad debt will get a higher interest rate because they are more likely to default on their loans. To compensate for this greater risk, lenders charge bad credit borrowers higher interest rates to make up for the higher risk of loss.

From the view point of a bank , it is necessary to ensure the repayment of credit money since only they can retain in the banking sector. As a financial institution, bank charges different interest rate or cost of credit to their customers on the basis of their capacity to reimburse the borrowed money.Charging a high cost on credit to indigent customers ,a bank is attempting to compansate its bad debt risk. if the customers made any default in repayment , it will increase the bad debt of the financial institution and adversely affect its financial stability.

so we can conclude that ,bank has to maintain a different cost of credit rate to its customers based on their payback capacity then only they can nourish a sound financial magnitude.