How_Money_Works_-_The_Facts_Visually_Explained

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PERSONAL FINANCE

Debt

INTEREST AND

BANKRUPTCY

Interest

This is the cost paid to borrow money.

It is expressed as a percentage of the

capital borrowed. Various debt

products have different interest rates.

The rate might be fixed for a set period

of time or “variable,” meaning it can

change. It is important for individuals

to take interest costs into account

when borrowing to invest.

Bankruptcy

This is a legal process that releases a

person (or company) from almost all

of their debts. People (and companies)

can declare bankruptcy if they do not

have a realistic chance of repaying

their debts depending on the type of

bankruptcy filed. Although it can offer

a fresh start, the financial consequence

can be that it adversely affects a

person’s credit rating, and therefore

their ability to borrow in the future.

$55,000 $55,000

$55,000 $55,000

$55,000 $55,000

$55,000 $55,000 $55,000 $55,000

$55,000

E-T YPE E-T YPE

E-T YPE E-T YPE

E-T YPE E-T YPE

E-T YPE E-T YPE E-T YPE E-T YPE

E-T YPE

Buyer A

Sells E-type Jaguar

for $55,000, making

profit of $5,000

Buyer B

makes

a gross

profit of

$50,000

One year later

One year later

$5,000

$50,000

A

B

CARS INCREASE IN VALUE

Buyer B makes a larger profit as the

gains are multiplied when selling the

cars at a profit of $5,000 each. His

gross profit is $50,000; net profit can

be calculated by deducting interest

payments. However, there is also

the possibility of losing money.

$ 729

billion

credit card

debt owed by

US consumers

US_206-207_Why_we_use_debt.indd 207 07/11/2016 11:22