00:01
So what determines the price of credit? what determines the interest rate, right? there are a couple of things that determine the interest rate, but the key idea here is risk is crucial.
00:16
If you know you're going to get paid back, it's very different than if you're unsure.
00:22
So in general, we should expect lower rates for less risk and higher rates for more risk.
00:34
Right the riskier a proposition is the more interest people will demand in compensation if you're looking at a 5 % loan to a very risky person or a 5 % loan to a not so risky person you're going to lend the money to the not so risky person so in the marketplace the risk will be associated with the interest rate so let's go through these choices a credit card high risk credit cards are high risk because there are no or very little recourse.
01:14
If you stop paying your credit card, the credit card company will send a mean letter to your credit bureau and say you're not a very good person.
01:25
But that's probably it, right? they might send a debt collector after you, but that's at work, you know, really they're just going to have someone call you and ask to pay it.
01:32
And if you hang up on them, they're just eventually going to give up.
01:35
Right.
01:35
So lots of credit card loans don't get paid.
01:40
But compare this to a car loan.
01:44
For a car loan, you can seize the car.
01:48
So if someone doesn't pay the credit card, even if you can throw them in jail, you still might not get your money back because they might not have any money.
01:56
But if someone has a car loan, presumably they have a car and a car is an asset, right? so you should expect lower interest rates on cars because the bank knows that unlike the credit card, if you stop paying your loan, they can just take the car and that's good for the lender.
02:15
They get something.
02:16
They can sell the car and make back some of their money, right? c, a house loan is even safer...