Borrowing has become a norm in today’s generation. Individuals borrow money at some point in life – for example, by using credit cards to borrow a little money for groceries or taking a 20-year mortgage. Borrowing money from lending institutions doesn’t have to be bad, provided that you borrow what you can repay.
Why do people borrow money in the first place? Economists believe that the number of people borrowing today has spiked upward in recent years due to increased income. A high income indicates that you have a higher debt capacity (higher likelihood to take on a larger debt and repay without struggling). For instance, if you have a £65,000 income, borrowing £5,000 shouldn’t be much of a problem because you can easily pay it back. With a lower income, it is more difficult to repay a similar amount.
People also borrow money due to the increased prices of goods and services. For instance, buying a house today is not as easy as it would have been 20-30 years ago. Housing prices have risen to such a point that only a handful of members of society can raise the amount without borrowing. Here are more reasons why people borrow money.
- Borrowing For Emergencies
Emergencies occur all the time. But in most cases, not everyone is prepared for unexpected spending. Having an emergency fund can play well to your advantage, but it might not be enough to cover all the abrupt costs. For example, you got involved in an accident, and insurance pushed some of the costs your way. If there was too much damage and you don’t have enough money, borrowing gives you a chance to make all the necessary repairs.
- For Investment Opportunities
Some people borrow money to invest in future opportunities. They analyse the current opportunities and pick out the ones with the most promising rates of return. By investing in such opportunities, you stand a chance to increase the value of the money you borrowed.
Sadly, borrowing to invest is not 100% safe. There are several risks to watch out for. Some factors such as the business environment may change, the rate of inflation and political factors may fluctuate, making it difficult to get the most out of your borrowed money.
- High Cost of Fixed Assets
Some items cost a lot of money, and your salary may not be enough to cover the total cost. For example, if you want to buy a car, boat, or a cabin, chances are, you’ll have to find an extra source of money to cover these items.
Other people find it necessary to apply for loans to restore their lives and pay for their fixed assets after losing their jobs. You don’t want the lenders to auction your property after losing your job.
- Loans for Study
Some people borrow money to keep themselves in school and improve their knowledge and skills. Student loans are widespread nowadays. The government and other lenders award student loans provided that the applicant is a full-time or part-time student. Student loans can be used to cover tuition fees, accommodation, food, transport, and anything related to your studies.
Education is a kind of investment. People invest in their skills and knowledge to open doors to better employment in the future. The benefits of borrowing money for studies can last a lifetime, provided you account for every penny. You should make wise decisions on how you spend that money because nobody wants to find themselves deep in debt without first accomplishing their goals.
- Borrowing for Travel
If you’re into living life to the fullest, travel is probably at the centre of your future plans. There is a place you dream of visiting for a long time. But due to a shortage in finances, you can’t get there in time for the upcoming event. That’s where borrowing comes in.
Some people borrow money to travel around the world. Of course, you’ll have to give up some things in the future. It is common to find people travelling on loans, especially during holidays. Always track every penny to make sure you receive the most out of your travelling loan.
There are several other reasons why individuals borrow money. The bottom line is, you should always be conscious of how much you borrow. Don’t borrow what you cannot afford to pay since this will leave you in financial stress and affect your credit score if you can’t pay up in time. For more information about loans and personal finance, Låna Pengar here.