Reading Time: 1-2 Minutes
Reasons to Borrow – Excessive Borrowing
People use credit to pay for goods and services that cost more than they can afford to pay for on their current income. Here are four major reasons people borrow:
1) Large Purchases. Instead of paying cash for a large purchase like a house people borrow to get the house. Big ticket items become more affordable when you spread the payments out over time. Plus, the buyer can enjoy the use of the asset right away.
2) Financial Emergency. Some people have to borrow when they find themselves in a financial jam. People without a cash reserve will borrow from family, a credit card, or from a bank.
3) Investment. Ever heard of a margin account? Yes, this is borrowing! Some investors use margin to purchase stocks or sell stocks short using credit. What about rental property? Sometimes, real estate investors borrow money to purchase rental property.
4) Convenience. There are all kinds of charge accounts and credit cards out there. You can pay for just about anything using borrowed funds: gas, clothes, doctor, dental, stereos, and food. In most places it is easier to use a credit card than pay cash or write a check!
FYI: Technically, credit card purchases that you pay off when they are due are still considered borrowed funds even though there is no incurred initial interest.
Credit is important in personal finance because it can help you acquire more expensive items in a systematic fashion. The luxury of credit can keep your budget from going to pot! However, tread lightly if you decide to borrow. Excessive borrowing ruins financial futures.
Related posts:
Recent Comments