Why Do Consumers Borrow Money?

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Consumers borrow money to pay for items or expenses they cannot afford at the moment or to make purchases without paying cash. Circumstances that typically require borrowing include buying a home or car and paying for higher education.

Significance

When a consumer chooses to borrow money he is essentially paying some amount of money to put off the payment of an expense until sometime in the future. The amount consumers must pay to borrow money is usually represented as an interest rate, which is added to the amount borrowed.

Methods

Consumers can borrow money using several different types of debt instruments. Mortgages are a common type of loan in which the consumer borrows money to purchase a home or uses the equity of the home to secure a refinanced loan. Personal loans typically are smaller loans that are not secured by property and can be used for a variety of purposes, such as purchasing a car. Credit cards allow consumers to borrow money up to a predetermined credit limit.

Drawbacks

Consumer borrowing can lead to several negative consequences. If the consumer fails to make payments on borrowed money or does not abide by some part of a loan agreement, it is called a "default." Defaults can result in repossession of goods purchased with a loan or foreclosure on a home purchased with a mortgage. Missing payments also can harm the consumer's credit scores, which can make loans more difficult to secure and more expensive in the future.

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