Page 80 - CalcBus_Flipbook

10-2 Credit CH 10]

How does credit improve an economy and its people? In the United States, a capitalist country,
it is quite a simple process for you to purchase a new or used vehicle. You make your purchase for
either cash or take a chattel loan on your purchase. As there are many automobile dealerships
throughout the country, with practically one dealership every three city blocks, all you need do is
select the year, model, color and accessories.
Capitalism vs. Socialism with Credit. Consider that you have made the decision that it is
time to purchase a Fiat for yourself or family, and you can acquire this vehicle with cash that you
have on hand from the savings out of your pay. You present yourself to the car dealership, pick the
one you want, fill out the title transfer paperwork for your city, county and state, and those
licensing agencies that will add a tax to your purchase, making certain that you have insurance for
your vehicle, and the car dealership gives you the keys to your purchase, and off the lot your drive
to enjoy your new Fiat. This transaction is as simple as buying groceries.
If you do not have the money in hand for an all cash purchase, then simple arrangements are
made with your bank prior to your purchase or even the finance company the car dealership has
lined up to facilitate new purchasers. You make the arrangements, add loan documents (a promise
to pay) with the stated purchase prices, down payment, life of the loan which may be 4, 5 or 6
years, and knowing what the monthly payment will be, complete the other documents necessary for
the transfer, gather your keys, and off the lot you drive in your Fiat. Simple enough, with credit
availability and your credit worthiness, you make your purchase, improve your standard of living
from walking or taking the bus to driving your own mode of transportation. At the end of the loan
life, the vehicle you selected and purchased on credit is yours, fee complete.
How does a non-capitalist country, a socialist country, with a planned economy facilitate the
purchase of a Fiat without credit for customers? Presume that you lived in Hungary during the
years it was a communist (democratic socialist) country. You decide to purchase a Fiat that will be
built in the Fiat auto factory in Moscow, Russia. Arrangements will be made for a portion of your
pay to be sent to the vehicle ordering firm, and this could be 4, 5, or 6 years of payments depending
on how much you decide to have deducted from each paycheck. After the last payment is made the
order for your Fiat is sent to the Moscow factory and in 9 more months your Fiat is delivered to
you. Of course you will need to add side door mirrors, seat belts, sun visors, a radio, and
windshield wipers after you receive your car. Five years of payments and 9 months of waiting and
the vehicle is yours.
How does this compare to the capitalist system? In a capitalist economy you have the use of
your vehicle as you pay down the loan balance which is the advantage of credit. Your purchase will
come with side door mirrors, windshield wipers, a radio, seatbelts and sun visors already installed.
In the socialist economy you pay for your car over years before you take possession and drive it and
even then you still have more to add to it — the difference between a capitalist economy and a
democratic socialist economy is that a capitalist economy facilitates the consumer and commerce.
Theoretically, to sell for cash is ideal for the retailer. Nevertheless, the retailer can increase
sales, and presumably profit, by extending credit to customers. Credit can be a means of increasing
not only the number of sales but also the size of the average sale. Credit customers identify with a
store and do not shop around as much as do cash customers. The retailer who sells on credit,
however, has the additional expenses of record keeping, investigating customer credit ratings,
following up on delinquent accounts, and writing off bad accounts. To cover these expenses and
realize an interest return on the money invested in customers' accounts, credit customers pay more
than the regular cash price of the goods because they typically pay interest on the credit purchase
that they make. This extra amount charged for the use of credit is the finance charge. Thus, the
interest to the retailer on their charge accounts is another source of revenue; a profit center.

PERSONAL LOANS AND BUSINESS CREDIT
Loans of any type represent borrowed money. For the individual, there are personal loans that
are granted on your good name and chattel loans whereby you pledge the forfeiture of an asset
should the loan not be repaid. Personal loans can be arranged at a bank or when you receive a
credit card. These loans are based on your good character and history of borrowing and paying
back the loans. There is no pledge of assets other than your good name. A chattel loan is where
tangible property that is either movable or immovable, other than real estate, is pledged to satisfy a
loan should you fail to pay the debt incurred by the loan. A typical chattel loan is an automobile
loan where by the lender has a title to your vehicle and you have actual possession. A farmer may
put up for chattel his crop, livestock, poultry, tractors or harvesters and other equipment for loans.
A manufacturer may pledge the equipment in the factory for the debt; a trucking firm could pledge
the tractors and trailers that haul freight.
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