Borrowing money is an inevitable part of life for the majority of people who want to buy a home, establish a business, or fund an education. Borrowing for such purposes is not only necessary in many cases but also a wise investment, as each can reap returns through appreciation of assets. The exceptions apply when funding an education that will not lead to a salary commensurate with the amount expended on the loan; when a property is purchased with an overinflated price and low equity; or when a business idea is not thoroughly thought out or implemented effectively.
Nevertheless there are many forms of borrowing which are unnecessary and not worth the expense or the exposure to debt. Before borrowing money it is important to consider if the amount that will be repaid in total represents an appreciable return. The type of borrowing that is rarely a sound investment includes new car loans, credit card debt, loans for vacations, and home equity loans which reduce the appreciable gain that capital repayments represent.
Before borrowing money it is vital to comparison shop to compare not only interest rates but fees. Borrowers need to consider penalty clauses, the length of repayments, and affordability. The choice between unsecured and secured borrowing needs to be weighed up, as the latter may generally cost more but does not require an asset provided as collateral. Secured loans can result in the loss of the secured asset if payment problems arise and the loan goes into default. Consumers should consider the risk of home foreclosures, car repossessions, court costs in some instances, and the perils of reduced home equity which will arise if money is borrowed against the home.
Unsecured loans also carry risks if the borrower overextends themselves. The most obvious danger is the negative impact on ones credit score which will result in less ability to borrow at preferential rates, higher insurance premiums and the possible impact on employment opportunities. Loans or credit cards which go into default will result in collections activity which many borrowers find stressful and which may ultimately result in bankruptcy.
Borrowing money that may become difficult to repay through reduced income, medical expenses or budget mismanagement, can have long term consequences. Student loans remain non dischargeable even if the borrower succumbs to bankruptcy. Home repossessions may result in deficiency judgments being pursued by lenders several years down the line. Second mortgages can put a home at risk.
Those who borrow whilst having a solid budget in place and can afford the repayments even if interest rate rises cause their payments to rise, are less prone to the negative consequences of borrowing. However those who borrow from necessity due to inadequate funds to service debt, expose themselves to the inherent danger of borrowing without a security net.
Borrowing to fund today’s wants, financed with fees and interest charges, is never a wise move. The total costs far outweigh the initial expense and represent a loss. In such instances saving for the wanted item or vacation will ensure that tomorrow’s salary is not funding yesterdays spending, thus bringing security to the consumer.