Dangers Of Borrowing

Borrowing or taking out a loan is the acquisition of money or property in the current time which is to be repaid or returned in the future. In other words, a borrowing loan is an agreement whereby a lender (the party giving out) gives money or an asset to a borrower (party being given) of which the borrower agrees to repay the money or return the asset after an agreed period of time. Usually an interest (it's an amount to be paid above the initial money borrowed) of an agreed percentage is to be paid.

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Advantages

There are many advantages to borrowing, for example a loan to invest in the stock trading, starting a business or expanding a business which is already in operation. Or perhaps it is needed in case of an emergency (e.g. medical emergency or car emergency) whereby the issue at hand cannot be held until a later date but it has a down side.

Dangers

There are dangers of borrowing especially when borrowed from the wrong financial institution. Like any other business, the aim of the person lending out of money is to realize a profit at the end of the business year. Some of the institutions use any available means to realize their objectives, even if it will be achieved by unfair or exploitive means. Some financial institutes charge very high interest on loans of which, by taking an example of payday loans, if the issue at hand may be put on hold until the next pay day, the borrower ends up using more money e.g. if the loan was for acquisition of an asset e.g. furniture, the borrower ends up spending more, this is the principle plus the interest of which some institutions charge as much as 40% of the money borrowed.

Low Income

Other dangers of borrowing is that it drains money from low income communities whereby taking an example of payday loans, most of the people who use this service are the low income earners of who have no assets which they can offer to traditional banks which charge less interest on money borrowed. The worst dangers of borrowing are that it doesn't encourage people to save in case an emergency arises, e.g. medical emergency. As you can get payday loans quick and easily it gives borrowers a false sense of financial security. Another danger of borrowing is that if a person borrows money for investing in a certain project but due to un-anticipated situations, he or she loses the money invested but the lending institution will not consider the loss that the borrower has had. They still expect the borrower to pay the full amount plus the interest.

Recovery

Another pit fall of borrowing is the recovery of the loan if the borrower is unable to repay. Some of the lending institutions demand a lot of assets to be offered as security. The most common method of recovering loans is that the borrower is asked to draw up a post-dated check (check with a future date) to the lender and if the check fails or if it bounces, then the issue is made to be a criminal offence for check fraud. The court may then order for the recovery of the loan by selling the assets which were offered as security for the loan. This leads to the borrower losing assets which accumulate more than the money borrowed.

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