Borrowing money involves obtaining money from a lender with an agreement to repay the borrowed amount later, often with additional charges of interest and fees. Interest and fees compensate the lender for allowing you to use their money. Borrowers can get loans from banks, credit unions and finance companies. Depending on the type of loan, security is provided to the lender. The lender holds the security in case the borrower does not repay the loan as agreed. Security may be your house, car, investments or cash.
Some common reasons for borrowing are to:
Borrowing money can offer several benefits, depending on your financial situation and goals. Borrowing can enable you to achieve your goals sooner. For example, starting a new business, pursuing higher education, investing in real estate and buying a home. Borrowing allows alternative use of savings. Instead of paying upfront, savings can be invested to potentially earn higher returns than the interest on the loan. Responsible borrowing helps to build a positive credit history, making it easier to qualify for future loans. Borrowing can also help in managing cashflow fluctuations. For example, short-term loans can cover operational expenses for businesses during slow periods.
Borrowing money can be a useful financial tool, but it also comes with risks. Some common risks associated with borrowing to look out for:
While borrowing has benefits, it’s essential to borrow wisely, assess risks, and choose the right type of loan for your needs. Remember to assess your financial situation, compare loan terms and have a clear repayment plan.
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