Debtfree Issue 202303 - DB SE

DEBT REVIEW AND YOUR CREDIT SCORE
BORROWING &
LEVERAGING
You “need money to make money”, the saying goes.
One of the main reasons why banks collapse is
because of their heavy reliance on borrowing money
themselves, and then leveraging those funds to make
money before they have to pay it back.
Banks do not have vaults full of gold, like in the old days. In modern
times money is mostly 1’s and 0’s on a computer. In fact, you might
find that banks give people loans that are based almost totally on the
promise of money that the client will eventually pay back. Still, banks
are required to have at least some of the money they lend out or use.
Banks borrow money from depositors (their savings clients) and other
creditors and then in turn, they use that money to grant loans and
investments. This process is known as leveraging, and it can amplify
profits when things are going well.
However, it can also magnify losses when things turn sour. Since
banks have borrowed money, they also have to pay it back. To do that
they need to be making a profit or to borrow even more money (from
the reserve bank or investors) to make payments.
Sound familiar? We all know how hard it can be to repay debts to lots
of different people.