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Borrowing Money

Borrowing money allows you to buy something now and pay for it later. There are different ways to borrow money:

  • Credit Cards
  • Loans

Borrowing money costs you more because of interest. Interest is the price you pay for using someone else’s money. For example – you want to borrow $100 from the bank or credit union in order to buy a new laptop now. The bank or credit union will lend you the money if you agree to pay $20 in interest. You agree to pay $20 in interest, the bank or credit union lends you money and you buy the laptop. When it’s time to repay the loan, you owe the bank or credit union $100 plus $20 interest. You repay the bank or credit union more money than you borrowed in the first place.

Why Do People Borrow Money?

Borrowing money comes at a cost. This extra cost is called interest. If borrowing money costs more, why do people still do it? Here are three reasons why:

  • They don’t want to wait
It’s better to wait until you can afford something before you buy it. Some people do not want to wait. They borrow money that they cannot repay, and they go into debt.
  • They need to buy something REALLY big
Remember how it’s better to save money to buy things yourself? This is hard to do with something as big as a car or a house. By borrowing money, people get to use their car or house while they are still paying for it.
  • They have an emergency
Sometimes, people need to pay for accidents or unexpected repairs. It’s important to save money in an emergency fund so that you do not have to borrow money the next time an emergency takes you by surprise.

People often borrow money to help pay for these items — what do these items have in common? You can save up for these items yourself, but it would probably take a very long time. By borrowing money, you can  start using what you buy (while you’re still paying for it).

WHEN YOU REPAY AS PROMISED:

  • You build a good reputation (“good credit”)
  • The bank or credit union is likely to lend you money in the future

WHEN YOU DO NOT REPAY AS PROMISED:

  • You build a bad reputation (“bad credit”)
  • The bank or credit union may charge you more interest
  • The bank or credit union may refuse to lend you money in the future

Additional Resources:

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