Borrowing Money

This article discusses borrowing, the types of loans and the advantages and disadvantages of both 

What is borrowing?

Borrow - verb

To receive an asset on loan with the promise that it will be returned.

Borrowing refers to the receiving of money that has to be repaid - a loan. Borrowing is done in order for people to purchase something that they could otherwise not afford, so that it can gradually be paid off in the future.

Borrowing is usually done through a bank. The bank (creditor) lends money to the receiver (debtor) with a fee, known as the interest.

The loan refers to the money that is borrowed, and borrowing refers to the process of receiving a loan. Normally, though, they can be used synonymously.

Types of Loans

There are four distinct types of loans, comprising of

• Credit Cards

• Mortgages

• Personal Loans

• Lay by

Credit Cards

This type of loan is by far the most common. Chances are, most people already have a credit card. Like every other kind of loan, credit cards allow people to purchase goods and services that they could otherwise not afford, but they main difference that sets credit cards apart is their convenience. Credit cards use electronic transfers for purchases and require no paper documents (except for the receipt). Plus, their borrowing limits (limits of $30000 or more are common) are far greater than what could be carried as cash.

Credit cards have a grace period - a time where the card owner can pay back the debt interest free. Unfortunately, credit cards have extremely high interest rates and if the owner is unable to pay back the debt, it could mean consequences.

Mortgages

Mortgages are loans taken out in order for an individual to purchase property, and they are the biggest loans that one can apply for. On average, a mortgage is around $300'000, although mortgages of more than a million dollars are not uncommon.

Mortgages have very little interest compared to credit cards because they are secured loans, in other words, if the owner is unable to repay the debt, the bank can confiscate the property and in some countries (including Australia) declare the mortgagor (the person holding the mortgage) bankrupt. This will certainly mean very serious consequences, and the person in question may lose their home and all their property.

Personal Loans

Personal loans are loans used for personal purchases, such as computers, cars, renovation, etc. They are very similar to credit cards, their only difference lies in the fact that credit cards are completely electronic, while personal loans are not.

Lay-by

Lay-bys are a special type of loan, normally given by retail outlets. When a good is purchased from an outlet that a person cannot pay for, they can choose to pay using a lay-by, where a deposit is made and the rest of the item is paid off through monthly instalments. Unfortunately, lay-bys have an incredible interest rate and if the purchaser cannot repay the loan before the interest free period has ended (normally 2 years), they can face interest rates of over 30%. Of course, if the purchaser is careful then they will not have to pay any interest.