Julia's Use of a Payday Loan for Investment in Car Repairs
This example illustrates borrowing for investment, where Julia considers working for a ridesharing company like Uber or Lyft. To qualify, she must make cosmetic repairs to her brother's car. She finances this by taking a loan from a payday lender at a 78% interest rate, the same high rate used in the borrowing-for-consumption example in Figure 9.3. Her resulting financial options, or feasible set, are depicted in Figure 9.13.
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CORE Econ
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Introduction to Microeconomics Course
The Economy 2.0 Microeconomics @ CORE Econ
Ch.9 Lenders and borrowers and differences in wealth - The Economy 2.0 Microeconomics @ CORE Econ
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Julia's Use of a Payday Loan for Investment in Car Repairs
Investment Borrowing by Chambar Farmers
Loan Purpose Analysis
A recent college graduate is considering taking out a loan. Which of the following scenarios best exemplifies the principle of borrowing to finance an investment that is expected to generate future income?
Distinguishing Loan Purposes
Evaluating an Investment Loan
Match each scenario with the primary economic purpose of the borrowing described.
A high-interest loan, such as one from a payday lender, is always an economically irrational choice for an individual, regardless of its intended use, because the high cost of borrowing will invariably outweigh any potential future earnings.
Justifying High-Interest Investment Loans
A freelance graphic designer is considering taking out a high-interest loan to purchase a powerful new computer and advanced software. They believe this upgrade will allow them to take on more complex, higher-paying projects. To determine if this loan is a financially sound investment, which of the following comparisons is the most critical for the designer to make?
Evaluating a Small Business Loan
A coffee shop owner is considering taking out a loan to purchase a new, high-capacity espresso machine. The owner knows the full cost of the machine and has been quoted a fixed interest rate for the loan. To determine if this is a sound financial investment, which of the following factors is most critical for the owner to analyze?
Evaluating an Investment Loan
Julia's Maximum Present Consumption at a 78% Interest Rate (56, 0)
Julia's Borrowing Choice at a 10% Interest Rate: ($70, $23)
Julia's Choice to Borrow and Spend $30 at a 10% Interest Rate
Julia's Borrowing-Only Feasible Frontier (78% Interest Rate)
Loan Repayment Calculation Formula
Julia's Maximum Present Consumption at a 10% Interest Rate: ($91, $0)
Julia's Feasible Frontier at a 10% Interest Rate
Effect of a Higher Interest Rate on Julia's Feasible Frontier
Comparison of Feasible Sets: Marco (Saver with Assets) vs. Julia (Borrower)
Julia's Use of a Payday Loan for Investment in Car Repairs
Interest Charge
Learn After
Julia's Strategy of Splitting a Loan for Consumption and Investment
Julia's Car Repair Investment: 200% Rate of Return
Julia's Investment-Based Feasible Frontier (Borrow at 78%, Invest with 200% Return)
Figure: Julia's Optimal Choice with and without Investment, Showing Points G and I
Condition for an Investment to Expand the Feasible Set
Julia's Endowment at (0, 100)
Evaluating a High-Interest Investment Loan
An individual has no current income but expects $100 in the future. They can borrow money from a payday lender at a very high interest rate (78%). If this individual uses the loan to fund a productive investment (e.g., repairing a car to work for a rideshare service) instead of for immediate consumption, what is the primary effect on their financial possibilities?
An individual who borrows money at a very high interest rate (e.g., 78%) to fund a productive investment will always end up in a worse financial position than if they had not borrowed at all, due to the high cost of the loan.
An individual has no current income and $100 of guaranteed future income. They can borrow money at a 78% interest rate. They also have an opportunity to use any borrowed funds for a productive investment with a rate of return higher than the interest rate. Which statement accurately describes the effect of this investment opportunity on their financial options?
An individual has no current income and $100 of guaranteed future income. They can borrow money at a 78% interest rate. They also have an opportunity to use any borrowed funds for a productive investment with a rate of return higher than the interest rate. Which statement accurately describes the effect of this investment opportunity on their financial options?
High-Interest Loans: Consumption vs. Investment
An individual has no income today but is guaranteed $100 in the future. They can borrow from a lender at a 78% interest rate. They are considering using the borrowed money for a productive investment (e.g., repairing a car to start a delivery service) instead of for immediate consumption. For this investment to be a financially rational decision that improves their overall set of possibilities, what must be true about the investment's rate of return?
Evaluating a High-Interest Productive Loan
Analyzing Loan Use: Consumption vs. Productive Investment
Rationality of High-Interest Loans for Investment