The Dangers of Loans

The old adage of ‘never a borrower or lender be’ is an excellent one to follow, but unrealistic for anyone wanting to own the roof above their head, or finance a college education. Some things in life are just too expensive to save up for and thus loans inevitably come into play. They pose many dangers for the financially unaware: but even the financially savvy may well prefer not to have their home mortgaged to a bank with the inherent risk of losing their biggest asset if their circumstances suffer a drastic downturn.

Loans of course come in many shapes and forms, from short term to long term, secured to unsecured, and are supplied by reputable financial lenders and subprime lenders who are sometimes little more than loan sharks. Those who borrow without understanding the small print of the deals and take out loans without fully realizing the consequences of defaulting on payments can find themselves with their credit history ruined and their collateral lost.

Misunderstandings can occur over the cost of repayments, and people can make wrong assumptions over the APR applied by not paying attention to details. However irresponsible borrowers should not deter others who need loans from making use of them.

One should always be aware that loans are best used for ones future advantage, such as a mortgage loan as a way to both own a home and to invest in an asset which will appreciate in the future. In the same way a loan for a college education is making an investment in ones future as should lead to a higher salary. However financing vacations, jewelry and flash cars, which are not readily affordable, by using loans is not fiscally sound practice, as you could well end up paying long term for something which has already lost its value.

Anyone should be wary of taking a secured loan as the asset used as collateral is in danger. Often there may be little choice in the matter as large ticket loans such as auto loans and houses require the security of the asset you are in fact purchasing.

Other loans are granted which require the good will of a guarantor to co-sign the loan for a person with no credit history of their own, which typically applies to private student loans. These loans are non dischargeable and often co-signers fail to realize the personal repercussions of standing guarantor, and the banks are more than happy to play down the danger.

In general terms the dangers which loans carry are the loss of a major asset such as your home; high monthly repayments which one may struggle to meet; the high cost of interest to service the loans which the naïve often take on for the longest period, not understanding that by doing so the loan is actually costing far more; and the risk they carry to ones credit rating if not handled in a responsible manner.

Too many take loans as an easy option rather than saving up for a purchase, yet often short term loans are very expensive. In many cases it may be more of a viable option to obtain a low interest rate on a credit card rather than pay the higher APR on a loan.

The sensible advice is to only use a loan which you can comfortably afford to repay on a monthly basis; always be aware of any additional fees on top of the interest rate; and always avoid any type of loan which imposes an early of pre-payment penalty. Loans can be the downfall of some who take on more than they can afford, and combined with credit card debt can ruin lives if handled irresponsibly.