Why is the debt limit ratio and 28/36 rule more important to conservative lenders like Banks and Credit Unions and not so important for lenders like small Finance companies and Payday lenders?
What will be an ideal response?
Answer: Principle 8 states that risk and return go hand in hand. With the conservative lenders like Banks and Credit Unions, they are lending their depositors money and not their own money. They are also regulated by the FDIC and NCUA. This means that they generally will not lend money to people with no or poor credit or collateral, it's just too risky for them to do so. With the other, more aggressive lenders, it's their investors' money. These investors voluntarily provide money to earn the higher return associated with riskier loans. Even if a portion of the loans fail, the return on the performing loans outweighs the losses. These aggressive lenders take advantage of desperate or naive people who can't borrow from the conservative lenders for whatever reasons. Desperate and naive people do desperate and naive things, many times causing severe financial distress.
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