Money Management

Why do people borrow money?

Most people will borrow money at some point in their lives.  It is almost unavoidable.  Borrowing money to buy a house is obviously a large, long term, borrowing commitment.  Other kinds of borrowing are likely to be shorter term – on credit cards, store cards or borrowing from friends or family.    

So why do people borrow money?  People obviously borrow money because they need or want something they can’t afford out right. Some people borrow money to buy a luxury, like an expensive holiday, others borrow because of an emergency, like medical treatment or an essential household item breaking down, others borrow money in the hope that from it they can make more money – for instance to set up a new business.   

Borrowing money is not therefore always a bad thing.  Yes, it would be nice if we all had enough savings to buy what we wanted when we wanted it.   However, borrowing money simply needs to be managed by the borrower.   It is when the borrowing becomes unaffordable that it becomes undesireable. 

Mortgages are used to buy property.  Mortgages generally are large long term loans but in many countries such loans are viewed as a necessity by most people who want to own a house or other property.  Many different types of mortgage exist. Interest rates may be fixed (where the interest rate is the same for a period of time) or may be floating (which adjusts up and down depending on the market).  Generally mortgages last for 25 or 30 years.  Different types of repayment schemes are available – Commonly regular payments are made to reduce the capital and the interest over the set term. 

Credit cards are a common way people incur debt.   The cards are generally issued by bank after an application by the borrower is approved.  A credit limit will be set by the card issuer.  Cardholders then use the card to pay for goods or services or to get a cash advance.    The cardholder is then sent a statement monthly setting out how much is owed to the card issuer.  At least a minimum amount set by the card issuer must be paid by a due date.  Interest is charged on any balance which is left unpaid.  A fee may be charged if the borrower is late in making the minimum payment. 

Another form of borrowing is via a pay day loan via a lender like wonga.co.za who has recently entered the South African market.    Pay day loans are typically used for an emergency – they provide money quickly to applicants on a short term basis.   These types of loan they typically carry high rates of interest because they carry high risk to the lender are for short term borrowing and are usually available to people regardless of their credit history. This type of loan can however be a useful source of money if caught short and if you need quick access to cash. 

Whatever form of loan you are dealing with – huge or small, long term or short term, they all need to be entered into knowing what you can afford and in full knowledge of the repayment terms.   Sometimes taking out a loan can be very worthwhile are and can actually improve a borrower’s quality of life. 

Write a comment