The Basics of Borrowing Money

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We are all faced with decisions regarding money. For the majority of us, there are big purchases that we want to make that will require a loan. One of the biggest is the choice of taking out a loan. This brings even more questions, regarding the terms of the loan, who to borrow from, how much to borrow and can you repay it? 

Before facing these choices, it is useful to know the basics of borrowing money. It is a decision that can’t be taken lightly, so we recommend being armed with information. We’ve set out when it might be necessary, the different ways of borrowing, and what you need to have in mind regarding repayments.

Types of Loan

There are different ways to borrow, with different terms set out by the financial institution. More often than not, the type of loan is determined by its purpose or the repayment plan. 

One of the most common ways to borrow money is through a personal loan. It doesn’t have a designated purpose and can be secured or unsecured, meaning there isn’t any collateral, so it’s riskier for the lender.

Another way to borrow money is through closed-end credit or installment loans. They last for a set period of time and are used to finance a specific purpose. Typical forms of closed-end credit are mortgages, car loans, and payment plans for appliances.

Reasons to Borrow

Since loans are much more common than they used to be, it can be tempting to decide to borrow money for various reasons that come to mind. However, the benefit of the purchase should be weighed up against the debt, repayments, and other consequences.

On the other hand, there are plenty of good reasons to borrow money. It can depend on your life circumstances but will likely include: large purchases, buying a house or car; emergencies, repairs or boiler replacement; or education like a university or vocational courses.

Repayments

No matter your reason for buying, or what kind of loan you take out, the critical aspect of borrowing money is your ability to manage repayments. Depending on the loan type, you could be facing high or low-interest rates, but it all adds up to increased debt over time.

Budgeting for monthly payments is the best way to ensure you can pay it off. There are several advantages to paying off a loan early if you are financially able.

The Bottom Line

Having access to funds when you need to is definitely a positive thing, and if you know the basics of borrowing money, you can be prepared for everything that taking out a loan entails.

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