One of the major complaints people had about banks when the extent of the global credit crisis became clear was that they lent too much money to too many people who didn’t have the ability to pay it back.
Let’s face it, most of us would love to be able to spend more money than we earn in a month — if there weren’t any strings attached. But there are strings attached, although many people overlook them.
The problem is that banks either thought that the economy would continue to boom and wanted to cash in on people whose circumstances would only get better; or they just didn’t care if the Smiths couldn’t pay their car loan because the bank could just repossess the car.
Whatever the reason, it became clear that banks were taking risks and lending to people who had little hope of comfortably repaying the debt.
At the other end of the scale, many people took advantage of the system, took out big loans and enjoyed a short-lived period of financial windfall. When the money ran out, no big deal. They just filed bankruptcy to get out from under their debt and went back to living the life they led before. Banks seem to be learning the lesson – but look at what it took for that to happen.
The problem with debt is, you never know when the economy is going to falter, or your company is going to layoff employees, or some other emergency is going to happen to make it difficult or impossible to repay your debt. The best plan is to not have any debt, then you don’t have anything to lose.