Well, there's this crazy concept called "saving money" where you don't borrow from a bank but rather put some money aside every month to be able to afford something expensive
Yeah. Unfortunately this only works if you have enough money after you pay the bills etc. to put aside.
> The trick is you need to live somewhere. If you can't have a loan, the money goes to rent.
The difference is that a landlord wants a tenant who can actually pay the rent, but banks often hand out loans that are far more than the new homeowner can afford.
If a tenant can't pay their rent, the landlord will have to go through a long and painful process to remove them and find another tenant, and they'll likely be out many months of rent in the process, with nothing to show for it. If the bank doesn't get their money, they own the house, they get paid whatever costs they can't recover by PMI (which the former owner had to pay for), and they can potentially offer a loan to the next sucker to buy that same house.
> The difference is that a landlord wants a tenant who can actually pay the rent, but banks often hand out loans that are far more than the new homeowner can afford.
That's actually pretty rare – and the problem wasn't the load but the fact that the banks which engaged in those practices for a historically brief period of time were allowed to shift the cost to other people.
I've applied for mortgages three times – 1998, 2008 and 2011. In 1998 and 2011, everyone did their due diligence correct. In 2008, the credit union and the New England regional bank both behaved responsibly while Bank of America simply confirmed my employer and pre-approved me for loan over 3 times higher than I was asking for.
Guess the only one of those three which had any problems whatsoever with loans? The other two had default rates which didn't significantly change throughout the crisis.
The difference is that a landlord wants a tenant who can actually pay the rent...
The thread has drifted in a non-sequitur way (or maybe I misinterpreted your comment).
They were talking about saving money vs getting a loan. My comment was from the buyer's POV: you can't save for a house because you need the money to pay rent.
The greatest boon of credit is the generation of new businesses. IE, you fund a venture through a loan, which upon its success becomes a thriving business.
Beforehand, you could not save or afford the cost of the loan. Afterwards, you will make more than enough to pay it back.
Which is also the implicit risk credit is meant to impose on financers, which is why most countries have regulatory bodies that try to incentivize these kinds of loans. You put what you have up as collateral to try to make significantly more, but if you fail you lose a lot of ground and have to start over.
Plus, saving up the 10-50 thousand dollars (say, to start a restaurant in the US) required to start a business would take a significant chunk of someone's working lifetime.
To use a more concrete example, you can't make money weaving cloth when you can't afford a loom.
Just to support what other people are saying about you being correct but insufficiently pessimistic, this has been discussed a lot here in Washington DC in connection with licensing for food trucks. There's a huge amount of interest in the trucks because they're what you can get if you can save/borrow $50K. Here's an article from a few years ago which leads with an example of an experienced chef trying to get a venture off the ground and looking at well over $750K just to open the budget version of his restaurant:
“If anyone can understand the tension between brick-and-mortar restaurants and the mobile army of food trucks that has stormed D.C. in the past year, it’s Stephan Boillon. After he lost his job at Dino in Cleveland Park in 2008, the veteran chef sought to launch an upscale sandwich shop on Connecticut Avenue NW. His plan was to offer only cold sandwiches, which would enable him to build a restaurant with no burners, no oven, and no deep fryers.
But even Boillon’s stripped-down concept was going to cost $750,000 before the doors opened—a figure that didn’t include rent, utilities, insurance, advertising, taxes, labor, association fees, or any of the other overhead it takes to operate a business in a neighborhood that expects a lot from its entrepreneurs.
So with credit tight and investment money scarce, Boillon found a cheaper way into the gourmet sandwich business: a food truck. For $50,000, one-fifteenth of the price to build his brick-and-mortar concept, Boillon started El Floridano, his rolling unit dedicated to home-made roast-pork Cubans and other bread-driven bites. Boillon had traded a restaurant’s higher profit margin for a truck’s lower start-up costs.“
You're right, but undershooting it by a lot. $50k couldn't even open a Subway franchise in a really cheap location. And Subway has really cheap franchises. Most fast food restaurant franchises will have startup costs in the $250,000 to $3m range. (I use franchises because the numbers are easily available. Independent restaurants vary, and if you're doing an indie-feel coffee shop or hole-in-the-wall you might be able to swing $10k, but $100-200k is what you'll start at for the type of restaurant that might actually make money. Heck, your signage might cost $5k.)
The sort of capital needed for most businesses is beyond the ability of most people to save. For some businesses (like software or various types of personal services) you can pay a lot of sweat equity, but there's lots of other types that just plain need money capital. If you're just saving, most of these would be out of range for even the upper middle class.
Financing is even more important for business expansion. I can get a loan or raise money to buy equipment/rent space/hire people that'll let me expand my business to meet demand now. It'd take ten years to save that much from current profits.
"How were you able to start this with only $20,000?"
The restaurant business is particularly hard to break into: you need to rent the space, purchase all of the equipment (each piece of industrial kitchen equipment can run from the single to double digit thousands), furnish the interior, get certified, hire employees and stock perishables (including dishes), all before you can even serve one customer.
Not really - I know someone in the town where I went to school who opened a coffee shop using a combination of cash and credit cards at that level. She now owns the building the shop is in and a home in Hawaii. Not VC riches or anything, but not bad either.
Well, a restaurant isn't the only business venture an individual can get into. Just the other day I saw meme-photo (can't vouch for the validity/truthfulness) about a woman that made money at the beach by attaching balloons filled with margharita mix over her breasts. And charging party-goers (probably mostly male) for the chance to drink out of them.
Ridiculous and asinine example, but I bet she started off with no more than a hundred dollars in capital. Which means that entrepreneurship, and ingenuity are what's most important. Capital will follow.
Do you libertarians even listen to yourselves? The amount of disease that would spread... "hustling sketchy shit" is not a sustainable model of entrepreneurship.
Do you communists even listen to yourselves? He never said he was a libertarian. And where the hell do you get this "hustling sketchy shit" from? Do us a favor and reply to the comment, not whatever your mind twisted it into.
Yeah. Unfortunately this only works if you have enough money after you pay the bills etc. to put aside.