Most people frown when they hear the word “Borrow” because it makes them think of high interest rates, and nasty debt collectors.
But the truth is… “Borrowing” is neither good nor bad, and is more common in modern society than you may think.
Most people borrow for one of the following reasons:
Borrowing for Financing Big Ticket Purchases
The most important reason why a person may borrow funds is to enjoy earlier consumption of goods and services. An example is taking up a mortgage to buy property.
Saving the money may take too long and in the meantime, inflation may actually lead to an increase in the price of the item he or she intends to buy.
Spreading payments over time makes expensive items more affordable, and the consumer can use these items immediately, without having to wait till the full payment is made.
However, using credit means that a person may incur interest cost which can be expensive.
Borrowing for Convenience
Another reason is that using credit, particularly in the form of credit cards, is very convenient. Instead of carrying cash around, a single card will suffice for most payments.
Borrowing for Emergencies
Another reason why a person may want to obtain credit, is to have a cash reserve that can be used in an emergency, such as a period of unemployment. However, the use of credit is not the ideal way to provide for emergencies.
When Borrowing Becomes A Problem
People use credit as a financial tool to improve one’s financial situation, and as a way to pay for goods and services that cost more than they can afford. However, credit can become a problem if a person is unable to generate enough income to make repayments.
To avoid this problem, we recommend that you have enough cash in their savings account to cover between 3 to 6 months of expenditure for contingencies.
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If you need help on financial planning, please contact your trusted FLA Organization financial planner today!
