Consumer Borrowing - Essay Example

Comments (0) Cite this document
These households, businesses, financial institutions and financial markets together form what is known as the Financial System. In simple words, we can define…
Download full paperFile format: .doc, available for editing
GRAB THE BEST PAPER97.3% of users find it useful
Consumer Borrowing
Read TextPreview

Extract of sample "Consumer Borrowing"

ASSIGNMENT Roles and functions of Financial s and Markets: Households, Individuals, Businesses and Governments require funds to fulfill their needs of additional finance. These households, businesses, financial institutions and financial markets together form what is known as the Financial System. In simple words, we can define financial system as a process through funds are transferred efficiently from lenders (savers) to borrowers (users) of money. Savers (people, businesses, entities and government) are those with extra funds. For a variety of reasons, they choose not to spend all of their current income so they have a surplus of funds. On the other hand, there are users whose spending needs exceed their current income levels so they have a deficit. Therefore, they require additional funds to make up the difference.

These funds can be trasferred from suppliers to demanders of money in two ways. First is through Financial institutions that are of two types including depository insitutions such as commercial banks, saving and credit unions (also known as financial intermediaries) and non-depository instituions such as life insurance companies, pension funds and finance companies. Depository institutions especially banks accept deposits from savers (lenders) of money that they can withdraw on demand. They pool customer deposits and use these funds to make loans or investments to demanders or borrowers of money (consumers and businesses). These institutions make money because of interests rate that they charge from demanders, which is higher than what they to pay to savers or depositors of money. On the other hand, non-depositry institutions such as insurance companies accept business risks of their customers in return for a series of payments called premiums. They then invest their excessive funds after meeting their operating expenses (insurance claims, salaries etc). Finance companies offer short-term loans to borrowers. They usually sell securities or borrow funds from commercial banks therefore they tend to charge higher interest rates as compared to banks.

Second is through financial markets where people and organizations wanting to borrow money are brought together with those having surplus funds. Financial markets are primarily divided into primary and secondary markets. Primary market are those in which corporations raise funds by issuing new securities. In Secondary markets, on the other hand, previously issued securities such as mortgages, bonds and stocks are traded among investors. Stock exchanges are perhaps the best example of these type of markets. Whenever, a company sells stocks or bonds publicly or privately, funds are being transferred between savers and users. Savers can expect some sort of return from the company in the form of dividends or interest for the use of their money. (Boone and Kurtz, 2002)
Financial intermediaries are those entities with "low-cost" money such as banks, mutual funds etc. that provide funds for all manner of borrowers and investors; For example a bank providing a personal loan, a mortgage lender or financial entities creating investment markets, financial intermediaries keep the flow of funds moving. (William Pirraglia)

Consider a saver who has surplus funds plans to invest US$30,000 in buying a one-year certificate of deposit (CD) which is safer and more liquid than mortgages because it usually has a fixed rate of return. He or she might visit the nearest bank which offers CDs. The saver who opens a CD may receive a paper certificate but today it is common for a CD to consist simply of a book entry and an item shown in the savers bank statements. After the maturity, the saver would receive the principle plus interest.
In other situation, the bank can use the saver’s money to lend a consumer willing to borrow US$30,000 to finance the purchase of a new car. In this case, the financial intermediary will charge a specified interest rate higher than what it will pay to its original depositor. The borrower would pay monthly installments which would include the principle plus interest.
If there were no financial intermediaries, borrowers have to personally search for savers to meet their funds requirements and involve in direct dealing which would be costlier than the indirect transfer of funds through intermediaries.
Works Cited
Boone, Louis E. and David L. Kurtz (2002). “Contemporary Business”. Harcourt College Publishers.
Pirraglia, William. n.d. “What Are the Roles of Financial Intermediaries”. Available at Read More
Cite this document
  • APA
  • MLA
(“Consumer Borrowing Essay Example | Topics and Well Written Essays - 500 words”, n.d.)
Consumer Borrowing Essay Example | Topics and Well Written Essays - 500 words. Retrieved from
(Consumer Borrowing Essay Example | Topics and Well Written Essays - 500 Words)
Consumer Borrowing Essay Example | Topics and Well Written Essays - 500 Words.
“Consumer Borrowing Essay Example | Topics and Well Written Essays - 500 Words”, n.d.
  • Cited: 0 times
Comments (0)
Click to create a comment or rate a document


The Market for Borrowing Corporate Bonds

...?Introduction The corporate bond market contains those debt securities which are issued by corporations and sold to investors to raise operating capital. Corporate Bond markets acts as facilitators in issuing and trading debt securities. The corporate bond market can help in improving the financial stability of an economy and provide competition in the private sector as well. The corporate bond market can also help in enhancing the financial sector stability by reducing or mitigating the interest risk and rollover risk for the borrowers. An efficient corporate bond market will lead to the efficient allocation of investment funds. An efficient market will also lead to investments in riskier assets. The types of securities which can... be...
8 Pages(2000 words)Essay

Consumer Behaviour

...?CONSUMER BEHAVIOR Question In this case, trait theory was used to explain phone usage differences; looking through the chapter do you think there are other individual characteristics that could also be used to better explain mobile phone usage? The trait theory is very appropriately applied to explain the differences amongst individual phone usage; however, there is an array of other individual characteristics that can also be used to explain mobile phone usage. These characteristics are categorized according to their intrinsic and extrinsic relationship to personality. Factors that are more intrinsic to individuals’ personalities are their activities, interests and opinions towards mobile phones, these characteristics...
8 Pages(2000 words)Essay

US Deficit - International Borrowing

...US Deficit - International Borrowing Introduction United s has been on the largest net liability position in the world for years due to massive current account deficits. Statistics show that by the end of 2005, US had more than 20% GDP and its overseas claim amounted to over $2.5 trillion (Welch et al 503). The present US account deficit persists to go higher and higher, both in share of the US GDP and dollar terms. These tendencies have raised worries to the rest of the world on the sustainability of the US external position and where the state will borrow money from when it has massive debts from major countries. There is a risk of US facing a disruptive and sudden adjustment of current account which...
2 Pages(500 words)Essay

Finance: Savings, Borrowing and Investment

...? Savings, Borrowing and Investment Table of Contents Table of Contents 2 Introduction 4 Savings 4 Definition 4 Explanation 4 Principles of savings 4Example 5 Evaluation 6 Borrowing 6 Definition 6 Explanation 6 Principles of Borrowing 7 Example 7 Evaluation 8 Investment 8 Definition 8 Explanation 8 Principles of Investment 8 Example 9 Evaluation 10 References 11 Introduction The project deals with outlining the principles related to savings, borrowing and investment which should be considered and followed by “True Love Endures” to continue its operations and achieve success in the industry. Savings Definition Savings is the amount of the disposable income which is not spent on the consumption or use of consumer goods. It is either... of the...
9 Pages(2250 words)Essay

Predatory Practices in financial borrowing and lending contracts

...? of Lecturer] Law Predatory Practices Introduction In financial borrowing and lending contracts, predatory practices are actions and omissions that target weak, ignorant, and vulnerable people such as women and men new or not knowledgeable in the field of money lending. Particularly targeted and exploited by predatory practices are vulnerable groups that do not meet the conditions for obtaining conventional loans. The less educated, racial minorities, the poor, and the elderly, represented across all demographics, are the common victims of predatory lending practices (Aleo and Svirsky 34). The following are some of the characteristics of predatory practices in money lending. First, those targeted are chiefly the low income people... and the...
4 Pages(1000 words)Research Paper

In the current economic climate in Britain, the risks of starting up a new business outweigh the benefits, Discuss

...reporter points out, the economy is exceedingly depending on private, ‘and to a lesser extent to public borrowing’. He also says that the so called economic recovery is concentrated only in certain sectors and as a result, ‘manufacturing base is shrinking’ and the trade deficit is mounting. Obviously, all these reports reveal that UK economy currently is relying on a debt based recovery which will raise long term financial stability concerns. The growing rate of consumer borrowing is one of the symptoms of this economic crisis. Another point to mention here is that the highlighted GDP growth in fact does not add up for the country’s working class. For instance, over the past 12 months,...
4 Pages(1000 words)Essay


.... The financial system performs the overall function of moving money between savers and borrowers and this allows people to transfer their ability to use money to transform the world through time and space. (Shavinina 2003, p. 530) The financial system interacts with real economic activity through its various functions by which it facilitates economic exchange. What is the significance of this system for consumers, one may ask. The financial system plays an important role in mobilizing funds in such a way that they are transformed into assets that better meet the needs of individuals as investors and as consumers. A specific example is when financial intermediaries facilitate portfolio...
2 Pages(500 words)Essay

Educational Provision in Germany

...David Phillips and Kimberly Ochs provide detailed insight into comparative research and within educational s. They indicate that there are four stages in the policy borrowing process which can be identified as cross-national attraction, decision, implementation, and internalization. This brief analysis explores the authors description and research methods involved at each stage. The authors chose to model British interest in educational provision in Germany. In terms of the cross-national attraction, it is important for there to be an international context for the interest. For example, germany had a national overhaul of their education system after WWII. In terms of British attraction in Germany, they focused on 6...
1 Pages(250 words)Essay

UK Financial Services - Case Study on Borrowing

... increase in consumer credit was £78.93 while the daily growth of public sector net debt was £266 million. In addition to this, studies have shown that more than 5,000 individuals become homeless each year in the UK due to mortgage and rent debts. This level of personal debt has been blamed mainly on the country’s borrowing habit that has seen access to loans increased as credit companies compete for customers (Great Britain 2011, p.35). While it is important that individuals take personal responsibility for their debts, irresponsible lending can equally be blamed for UK’s unmanageable debt. Extending credit limits without permission from debtors increases chances of debtors overspending. Equally, loan and credit card offers sent... UK...
4 Pages(1000 words)Coursework

Music Genre Fusion Western Music borrowing from Non-western and Nonwestern music borrowing from Western Music

...Due: Music Genre Fusion – Western Music borrowing from Non-western and Nonwestern music borrowing fromWestern Music Music is often regarded as a universal language through which the musicians can communicate and interact with the people around the globe regardless of their different languages and cultural backgrounds. However, the strong relationship of music with the respective culture, race, nationality and society could never be overlooked since the musicians at large tend to represent the local traditions and values through their compositions and hence, music of every society possesses its distinguished features. Despite this fact, music can’t be apprehended in cultural or societal boundaries and...
4 Pages(1000 words)Assignment
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.

Let us find you another Essay on topic Consumer Borrowing for FREE!

Contact Us