As parents we want to equip our children with the tools that will help them in life. Financially, they will learn a little bit in school but it is really up to us to build on that teaching and make sure that they know everything that they need. It is good to lead by example, but if we feel that we are making financial mistakes then it is wise to explain this to them and why you feel that what you are doing is not right. This will allow you to be able to help them to learn form your mistakes. It is not as simple as we think though and many parents will teach their children to avoid all types of borrowing but this may not be a wise move.
The advantages of borrowing
It may seem that borrowing is just an expensive inconvenience but it actually has many advantages as long as you use it wisely. For example, many people would not be able to afford to go to university without the student loan scheme. Many people would not be able to buy a home without getting a mortgage and many businesses would not be able to expand without a business loan. Although the loans will still cost you money, you will advantage financially in the long run. For example, a student should be able to get a better paid job as a result of doing a degree and they will only have to repay the loan if they earn above a certain salary anyway. A mortgage will allow a person to no longer have to pay rent and they will be able to own a property that is likely to increase in value more than the cost of the mortgage. A business may be able to expand enough to bring in a lot more profit which will cover the costs of the loan and more.
As long as you pick a loan that is right for you and will buy something that will significantly improve your situation then it is not bad. Comparing the loan types to make sure that you use the right one and finding one that is a competitive price is also important as you will then not be paying more than necessary. It is also very important to make sure that you can afford the repayments. This is because if these are not paid on time you will end up having to pay additional charges and this will make the loan much more expensive. The stress of not making the repayments can also cause problems for you. So make sure that you are able to manage those repayments and think about how you will do this in the long term as well as the short term so that you can be confident that you will manage.
The disadvantages of borrowing
If you borrow money to buy items then you will have to pay extra for them. This is because you will need to pay interest on the items and there may be charges that you have to pay as well. Sometimes it could be worth paying this extra, particularly in the examples explained above. However, if you are buying luxury items, then it could be wise to wait and save up for them so that you do not have to pay the extra.
Some people will get into trouble with debts because they cannot afford the repayments. It is therefore really important to make sure that you can afford the repayments when you borrow money. You should be able to ask the lender how much the repayments will be and therefore be able to see whether you can afford them. By looking at past bank statements you should be able to see whether you would normally be able to afford them or whether you can cut your spending in any areas in order that you can afford them.
If interest rates go up then this can be a big problem for borrowers. Those that are on a variable rate of interest will find that they will have to pay more each month for their loan. This can be a problem if they are only just managing their repayments. It is therefore really wise to think about what might happen if the rates do go up and whether you will be able to cope. Having a plan in place in case of this occurrence can be really wise and will hopefully protect you from the stress associated with an increase in rates.
Some people find that being in debt is stressful for them. Just the thought that there are debts outstanding that need to be paid can be a constant worry for them. If you feel like this then borrowing money may not be a good idea for you. Constantly worrying can be a cause of illness and so it is not good to do this.