Addiction to Borrow Money

Borrowing money is not evil or wrong. It gets wrong when we are addicted to it. It happens with some people that they are in the constant habit of borrowing things like pen, money, magazines, comics, etc. The problem arises when they forgot to return the borrowed items.

Being addicted to something implies that we have tried our best to leave a habit but are unable to leave it. It is like a person addicted to smoking. The body urges the person to smoke cigarette from time to time. Similarly if our mind urges us consistently  to borrow items or money from others then we are addicted to it.

The addiction to borrow money can be highly dangerous as explained below:-

1. We borrow money to fulfill our needs and expenses.

2. When the time for returning the money comes, then we borrow money from someone else and repay our previous loan.

3. The second loan is greater then the first loan since we need to pay the interest also.

4. Every time we keep on borrowing to meet some previous loans or needs. It is a continous process with the debt amount continuosly increasing.

5. Finally the debt amount becomes so big, that we are forced to default on the amount.

It is loss for the lender, and also a very big loss to our credibility. This is one the most common reasons for bad credit that we face now. Always ask yourself some questions before borrowing money.

Excess of anything is bad. So do borrow money when you need it, but do not make it a habit. It can ruin you and the lender too.

Why Banks Lend Money

Banks are established to do business. No bank is there that will be interested in doing charity work. Now lending money is a risky operation, since there is always the risk of money not coming back from the borrower. Then the main question arises that why do banks lend money?

The answer to this is that, banks do business by lending money at higher rates as compared to the interest rate they pay to the account holders. I will explain this point wise.

1. We go to bank to open a savings bank account. A saving bank account is one of the lowest interest accounts. So it is a form of bank borrowing the money from us at very low rates.

2. Now there are people who are in need of money and want it immediately, they go to the bank and ask for loans. It might be for any reason like personal loan, home and housing loan, car loan, etc.

3. The bank lend money to these borrowers at a higher rate then it is paying to the saving account holders.

4. The difference in interest is the earning benefit for the bank. 

Suppose that a bank pays an interest of 4% per annum on Saving bank account. It charges an interest rate of 14% on car loans. So an amount of $50000 deposited in the saving bank account will become $52000, so a benefit of $2000 for the saving bank account holder.

On the other hand the bank lends the same money to a borrower for car loan at 14%, so the bank receives $57000 at the end of year. Therefore the bank profited by $7000 - $2000 = $5000. So we see that bank is earning without investing anything. But the actual case is that the bank bears the risk of the borrower defaulting on the loan. It is similar to the strategy of making money by taking a loan.

All the banks that lend money usually perform thorough background check of the borrowers credit and reputation in the market, so as to ensure that there money will be safe.

Now one of my friends asked me that, why is it that the banks give loans to those who already have money, and not to those who do not? The answer to this question is that the banks need to make sure that there money is safe. If a person does not have money to fulfill his means now, then there is a high chance that he will not be able to repay it later. On the other hand those who have money have saved it and know how to take care of money.

There are many other factors like the past credit records, reasons for borrowing money, is the person borrowing for investing or does he want to take care of his expenses.

Cheers,
Amit

Try to Borrow Money Privately

Everyone among us borrow money some time or the other. It might be asking money from parents, or borrowing money from friends or it might be via some bank or other lenders. Asking for some money is not a point of concern till we are dealing with our near ones.

When we take a loan from the open market, like banks, or financiers, etc, then our credit comes into picture. Moreover the market becomes aware of the fact that we have taken a loan. It implies that we do not have sufficient amount of money to sustain our current work.

This information could be misused by many people who do not like us, or just want to take advantage of the situation. Just imagine the scenario that you are doing some business and you applied for some loan from a financiers. If the dealing is not done privately and others came to know about this, then they would know that you are facing a crunch of liquidity right now.

It happens that people who have enemity with us or do not like the fact that we are growing, try to create new problems for our business and other parts of life. they are aware of the fact that we are short of money, so it is the right time to strike.

Giving away your weak points to others could result in your loss. So make sure to borrow money privately. This will always be helpful in the long run.