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Financial transaction

From Academic Kids

A financial transaction involves a change in the status of the finances of two or more businesses or individuals.

Contents

Purchase

The most common type of financial transaction. An item or good is exchanged for money. This transaction results in a decrease in the finances of the purchaser and an increase in the finances of the seller.

Loan

A slightly more complicated transaction in which the lender gives a single large amount of money to the borrower now in return for many smaller repayments of the borrower to the lender over time, usually on a fixed schedule. The smaller delayed repayments usually add up to more than the first large amount. The difference in payments is called interest.

Mortgage

A combination loan and purchase. A lender gives a large amount of money to a borrower for the specific purpose of purchasing a very expensive item (most often a house). As part of the transaction, the borrower usually agrees to give the item (or some other high value item) to the lender if the loan is not paid back on time. This guarantee of repayment is known as collateral.

Account

A bank is a business that is based almost entirely on financial transactions. In addition to acting as a lender for loans and mortgages, banks act as a borrower in a special type of loan called an account. The lender is known as a customer and gives unspecified amounts of money to the bank for unspecified amounts of time. The bank agrees to repay any amount in the account at any time and will pay small amounts of interest on the amount of money that the customer leaves in the account for a certain period of time. In addition, the bank guarantees that the money will not be stolen while it is in the account, and will reimburse the customer if it is. In return, the bank gets to use the money for other financial transactions as long as they hold it.

Credit Card Purchase

A special combination of purchase and loan. The seller gives the buyer the good or item as normal, but the buyer pays the seller using a credit card. In this way, the buyer is paying with a loan from the credit card company, usually a bank. The bank or other financial institution issues credit card cards to buyers that allow any number of loans up to a certain cumulative amount. Repayment terms for credit card loans, or debts vary, but the interest is often extremely high. An example of common repayment terms would be a minimum payment of the greater of $10 or 3% every month, and a 15-20% interest charge for any unpaid loan amount. In addition to interest, buyers are sometimes charged a yearly fee to use the credit card.

In order to collect the money for his item, the seller must apply to the credit card company with a signed receipt. Sellers usually apply for many payments at regular intervals. The seller is also charged a fee by the credit card company for the privilege of accepting that brand of credit card for purchases. The fee is normally 1-3% of the purchase price.

Thus, in a credit card purchase, the transfer of the item is immediate, but all payments are delayed.

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