Chapter 7 Loans—Pursuing Burdensome Opportunities

Lending is an important banking function. For every loan there are potentially two alternatives:

  1. Don’t take the loan and postpone or abandon the intended transaction.
  2. Finance the intended transaction from your own cash reserves.

Taking the loan after having given due consideration to the two alternatives is an investment decision: You expect that in the long run you will be better off by paying interest for the temporary use of money that is not yours. As almost everyone decides at one point in his or her life that the borrowing option is more attractive than the two alternatives, this is an intriguing concept that deserves a closer look.

Even though we consider loans to be part of investments, we have deliberately separated the topics. First, in Part Two on investments we focused ...

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