3 Things To Know Before You Borrow Money

Tuesday, August 4, 2020
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In difficult financial times such as the ones we are currently living in, borrowing money is considered a normal part and often a necessary part of managing your finances. We all take out loans and credit cards, often without really thinking about it. It’s so easy to get into a lot of debt, and people tend to get into financial trouble when they start borrowing without understanding exactly how debt works and how it can affect them. Educating yourself is the best way to avoid getting yourself into trouble, and these are some of the most important things to understand before borrowing money.

Where Debt Comes From
Understanding where debt comes from in the first place is important, but most people have the wrong idea. When a bank lends you money, it is unlikely that they have that money in physical form in their vault. Instead, they agree to give you electronic access to the funds in exchange for an interest payment. This how banks create money example goes into a lot more depth about how debt is created, how interest payments are decided and how lenders profit from giving out loans. It is important to understand this because then you understand that it is in the interest of the lender to keep you in debt for as long as possible so they can maximize the payments in the first place. Once you know this, it is easy to avoid simple mistakes, like only paying your minimum payments each month.

The Risk To Your Credit Score
If you borrow money and pay it back on time without missing a single payment, your credit score will be unaffected. However, as soon as you start missing payments, your credit score will suffer. Having a bad credit score makes it harder to secure loans or get a mortgage in the future and even if you can get a loan, the interest rates will be much higher. This becomes a slippery slope because future loans are even harder to repay on time, meaning that your credit score suffers further, and this is often how people end up trapped in a cycle of debt. It is important that you understand the risks to your credit score and only borrow money if you are confident that you can pay it back on time.

The Mental Health Risks
When people talk about the risks involved with borrowing money, they are usually referring to financial problems. However, being in debt can do a lot of damage to your mental health as well. When you are behind on payments and constantly being harassed by lenders, it causes a lot of stress and anxiety, which can easily develop into a serious mental health condition. Debt is also one of the biggest causes of relationship issues because couples argue about who is to blame for the debt and how they are going to pay it off. Before you borrow money, it is important to understand these potential risks to your mental health.

Borrowing money is a big decision and you shouldn’t do it unless you are fully aware of the risks and you are confident that you can pay it back on time.

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