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Borrowing
What is Borrowing?
Borrowing involves obtaining money or goods from a third party under an agreement to repay over a certain period of time.
Interest is normally charged which means you pay back more than you initially borrow.
People borrow for many reasons, the main purposes are likely to be:
- To provide funds to deal with a financial emergency
- To enable the borrower to purchase something that would otherwise be outside their financial reach e.g a house
- To enable the borrower to purchase something immediately rather than waiting to build up enough savings e.g car, furniture
The main methods of borrowing money are:
- A loan: which means borrowing from an organisation such as a bank or building society and repaying them with interest over a given period of time, normally between 1 and 5 years.
- A mortgage: which means borrowing from an organisation such as a bank or building society to purchase property. The lender usually holds the deeds to the property as security in case the repayments are not met. Repayment of the money, with interest, is usually made over a 25 year period.
- Credit: this means obtaining goods or services immediately and paying for them later. Payments can be made in instalments over a period of time which is usually short. The payments are either made to the provider of the goods or services, or to a third party such as a credit card company.
It is usual for interest to be charged on borrowing, occasionally retailers will offer interest free options as part of a sales promotion.
Before borrowing, here are some questions you need to consider:
- Do I need to borrow this money or should I try to save for what I want to buy?
- What interest and other charges am I being asked to pay?
- How long do I have to repay the debt?
- What are the repayments and can I afford them?
- Is there a better way of borrowing?
- What will happen to my debt if I met a temporary financial difficulty?
- Can I repay the debt earlier and if so, do I incur financial penalties?
- Does my past credit history make me a risk for which I shall have to pay higher charges?
Important Note:
Failure to meet the repayment conditions of the loan or credit card can lead to additional interest charges and sometimes financial penalties which can often be severe. In extreme cases, failure to pay can result in the repossession of the property or goods, which were subject to the borrowing.