The Dangers of Borrowing Money
For most people, at some point in their lives, there will arise a reason for them to need to borrow money. This could be to tide them over until pay day, assist them with buying a car or house, or to help them make a big investment. Whatever the reason, it often happens and should not be treated as a taboo. What normally casts negativity on these situations is the repercussions of borrowing money and not being able to pay it back.
At the moment, pay day loans are under much scrutiny because of their excessive interest rates that leave the borrower drowning in debt for a fraction of the amount they borrowed. Yet as bad as pay day loans are, they are not the only culprit. Society today moves much quicker than say, fifty years ago, and so requires money to be more accessible. Credit cards and personal loans are considered to be safe ways to borrow, yet both entail sneaky conditions that catch a lot of people out.
At the moment, pay day loans are under much scrutiny because of their excessive interest rates that leave the borrower drowning in debt for a fraction of the amount they borrowed. Yet as bad as pay day loans are, they are not the only culprit. Society today moves much quicker than say, fifty years ago, and so requires money to be more accessible. Credit cards and personal loans are considered to be safe ways to borrow, yet both entail sneaky conditions that catch a lot of people out.
Loans
As already mentioned, pay day loans are considered to be the worst way to borrow money. The government has agreed to act against the availability of companies preying on easily swayed and in need of money with their ‘Quick and Easy, Low Interest!’ lies.
Yet these sorts of loans are now (usually) treated with caution. What is persisting to keep trapping people into debt are personal and everyday loans. These can be provided by banks, rather than private companies, and so are seen to have more authority, and therefore, less danger. This is not the case however; their ever increasing availability means that they are being used for more and more mundane purchases, rather than a life-changing purchase. Due to this attitude towards them, the seriousness of paying them back can easily be overlooked.
Yet these sorts of loans are now (usually) treated with caution. What is persisting to keep trapping people into debt are personal and everyday loans. These can be provided by banks, rather than private companies, and so are seen to have more authority, and therefore, less danger. This is not the case however; their ever increasing availability means that they are being used for more and more mundane purchases, rather than a life-changing purchase. Due to this attitude towards them, the seriousness of paying them back can easily be overlooked.
Credit Cards
Again, credit cards have dropped in perceived danger ratings as pay day loans have risen to the top, but this does not mean that they are harmless. It is very easy to be drawn in to getting a credit card when they are advertised with glistening benefits and non-existent drawbacks. Plus, the fact that the credit card brands such as American Express and MasterCard are universal: if they were that bad, why would everyone have one?
An easy way to slip into debt with a credit card is because there is only a minimum monthly payment required, which is usually 5% of the amount of credit. This small amount can be very easy to pay back. But if you are having a hard month it is very easy to say ‘Oh I will pay back more next time’, or to just think of is as a small monthly payment at that level until the debt is cleared. What is often overlooked, or misunderstood, is that the rest of the amount due is then charged additional interest. So although you may feel like you are slowly but surely paying off the debts, you are probably not even making a dent.
An easy way to slip into debt with a credit card is because there is only a minimum monthly payment required, which is usually 5% of the amount of credit. This small amount can be very easy to pay back. But if you are having a hard month it is very easy to say ‘Oh I will pay back more next time’, or to just think of is as a small monthly payment at that level until the debt is cleared. What is often overlooked, or misunderstood, is that the rest of the amount due is then charged additional interest. So although you may feel like you are slowly but surely paying off the debts, you are probably not even making a dent.
Payment Protection Insurance
Or PPI as it is commonly known, allows consumers to cover themselves against debt repayments if an accident occurs, or their circumstances change, and they are unable to repay their debts. It is a very sensible approach to take if borrowing money, and is usually attained through authoritative banks and credit providers.
However, in a financial scandal, the Financial Services Authority (FSA) fined several notorious companies millions of pounds after they mis sold PPI to their customers. It was reported that of 20 million PPI policies sold in the UK by May 2008, 40% of policy holders were unaware that they had it. If suspicions were aroused, some companies even had their call services read from a script claiming that this charge was actually to protect their loan with no mention of the insurance policy itself.
It is also important when purchasing PPI that you fully understand the terms and conditions as they can often be overly complicated in order to disguise loopholes that leave the consumer stuck in times of need.
However, in a financial scandal, the Financial Services Authority (FSA) fined several notorious companies millions of pounds after they mis sold PPI to their customers. It was reported that of 20 million PPI policies sold in the UK by May 2008, 40% of policy holders were unaware that they had it. If suspicions were aroused, some companies even had their call services read from a script claiming that this charge was actually to protect their loan with no mention of the insurance policy itself.
It is also important when purchasing PPI that you fully understand the terms and conditions as they can often be overly complicated in order to disguise loopholes that leave the consumer stuck in times of need.
One of the main ways to avoid debt is to budget, and to budget realistically. Financial plans can be made weekly, monthly, yearly or to save up for a big investment. How often you make a financial plan is entirely up to you, but it is integral to your financial health that you stick to it. Then, with the right amount of budgeting and saving it is possible that you will be able to avoid borrowing money all together. If, however, you are struggling to keep on top of your re-payments, source financial help immediately, before it is too late.
Sources:
Sources:
http://en.wikipedia.org/wiki/Payment_protection_insurance
http://economictimes.indiatimes.com/how-to-avoid-falling-into-a-debt-trap/slideshow/7472199.cms
http://www.adviceguide.org.uk/wales/debt_w/debt_borrowing_money_e/debt_types_of_borrowing_e.htm
https://www.moneyadviceservice.org.uk/en/articles/help-if-youre-struggling-with-debt
Sources:
Sources:
http://en.wikipedia.org/wiki/Payment_protection_insurance
http://economictimes.indiatimes.com/how-to-avoid-falling-into-a-debt-trap/slideshow/7472199.cms
http://www.adviceguide.org.uk/wales/debt_w/debt_borrowing_money_e/debt_types_of_borrowing_e.htm
https://www.moneyadviceservice.org.uk/en/articles/help-if-youre-struggling-with-debt