Borrowing

Sometimes we want to save up for something that will cost a lot of money like a house, and can't simply put pennies in a jar to get it. For these large investments, a loan is necessary. A loan is an amount of money that the bank lends to someone in exchange for the money back in an agreed period of time and an additional interest rate. Special loans to buy houses are called mortgages and may take years to pay off. Small companies can also take out loans to fund their future projects. But of course, not everyone is eligible to get a loan from a bank. That is why most banks require you to tell them about what you are planning to do with the money. Then they will see if your idea is a good one and then give you the loan or not.

The total amount of money accumulated borrowing by a person is called their personal debt.

What defines the level of borrowing?

Interest rates

Interest is the cost of borrowing money. The more someone borrows, the longer it takes for the loan to be repaid and the more risk it involves, then the higher the interest rate will be charged by the bank.

Wealth

A person with a lot of money may be more willing take out a loan because they will be confident that they can repay it. In these cases, the bank will charge a lower interest rate because there is less risk that the person will default on the loan. To default means to fail to repay a loan. Sometimes, a loan can be taken out against an asset, such as a house. This means that if the person defaults, the house has to be sold to repay the loan.

Consumer confidence

If people think that they have a good future in their current job they are more likely to take out a loan than those who think that they might get fired soon.

Ways of borrowing and the availability of credit

The easier it is to borrow money, the more people will want to borrow. This includes credit cards, overdrafts, loans and mortgages. Also, if it is easy to take out a loan, say over the Internet, the more inclined people may be to borrow.