The Danger of a Loan

From time to time we may all be tempted to borrow money, especially if we want to buy a new yacht, car, second home, business, home improvements or pay for a holiday. A loan is where we borrow a lump sum of money and agree to pay it back over a period of time, usually with interest. It would certainly be with interest if you borrow it from a bank or loan company. They are in business to make money, to make a profit, not to help out people. They couldn’t afford to give loans without interest being paid back on top.

There are various risks involved in taking out a loan. Firstly, most loans are given only if you supply collateral. That means that you sign over your home or business or some other asset you own as a guarantee that you will pay back the loan or forfeit the asset supplied as collateral. Of course the bigger the loan the more collateral they will want. They are hardly going to lend you millions of dollars in return for the promise of an ordinary car if you cannot meet the payments! So a big part of the risk involved is that if, for any reason, you cannot pay back the loan, you lose the collateral. If this was your home that you live in this would be a huge blow to you and a huge change to your life.

Then you have the risk involved with paying back the loan itself. Are you sure that you can actually pay back that so much a month for so many years, as they are asking you to? Suppose your outgoings increase or your income goes down and you cannot? Will you not only lose your collateral but have all sorts of other problems too, such as the loss of the business you started to set up with the use of the loan? If you are borrowing this money to set up a business and you have to default half way through you may have wasted everything you spent on it, as well as a lot of time, you may also have given up a very good job to do this instead and lost that job and the income from that job.

But there are other considerations. Family and friends. If you borrow the money from a family member or a friend and cannot pay it back, even if they were kind enough to let you off of collateral and/or interest, it severely damages your relationship with them. They would probably not want to lend to you again nor trust you or even like you. Then there could be damage to your marriage if your partner is feeling that you made a complete mess of things. They might be worried sick for a long time and then see you overspend or make big mistakes or bad decisions, and the realisation of all this damages your relationship.

So your loan may start off as just a loan, then end up losing you family, friends, your home, your business and your job. Borrowing money is a very serious business. Banks sometimes make it too easy to borrow money from them. You have to think very carefully about this before undertaking it. If you have any doubts about your ability to pay back a loan, especially if it is to family or a friend, or means losing something important to you, then it may well be a good idea to cancel the whole idea or rethink it. Do you really need this loan? If it is for a yacht or a holiday it might be better to go without it and wait until you can truly afford it. Even if you can afford the loan and have no risk of losing collateral the stress involved in worrying about paying it back month by month might be quite harsh and may not make it worth it. Something like a holiday, which maybe only lasts for a few weeks, but which needs to be repaid over 2 years may not be worth all the stress, worry and expense. Especially if it means going without other things or having to work longer hours to meet the payments. Please give this a very serious thought before saying yes.