What is a Loan

In a conventional point of view, a loan is generally money or a currency taken by individuals or even companies when in need to cash. The money was being loaned to them for a stipulated interest generally based on an annual interest rates. In the business context today, most people are in debt because of housing loans, automotive loans, mortgage loans or credit cards. People take on the burden of these types of common debts in order to enable them to purchase things like houses, cars or even stocks or commonly known as security counters. Of the three types of loans, the most dangerous of all is probably credit cards. It is largely due to credit company’s high interest rates, which roll over month after month, and in worse case scenarios, a penalty fee incurred when the minimum amount was not paid that month.

The negative impact of loans can caused an individual to be depressed, unfocused and changed of behaviour. Individuals who are unable to pay off their debts are forced to declare bankrupt. Social problems arises when debt were not well managed and restricted properly. Most countries, if not all, set a standard in the maximum amount of debts that can be incurred based on the person earning capability, which is usually calculated based on the person annualised earning.

Although, the incurrence of loans is usually blamed on the individual’s poor financial health management, it can also subjected to the climate of economy health. In good years of economy, stock markets generally do well and bulls’ all the way to new heights. Individuals being practically influenced by the either vast potential of investing in stock market or peers may rush in to the stock markets. And if there are a huge number of these people, the buying just keeps going higher, thus pushing the prices of equities to ridiculously high price. This would in term cause an economic bubble. Not everyone has a large and extra amount of money to invest, so most people indulged in borrowings or loans from credit companies or banks to purchase their gems in the stock markets. When the bubble could not hold, it naturally burst and caused these people to fall in a great amount of excessive debts.

A classic example is the economy recession in the year 2000 that was caused by the burst of the dot COM bubble. Many people were caught in panic selling and caused the economy to downturn till 2002 before it start picking up again. This illustration tells us that debt can be avoided if you do not expose your borrowed money to extreme high risk like stock markets.