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Why do people borrow money?
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adigaskell
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PostPosted: Fri Apr 23, 2010 8:53 am    Post subject: Why do people borrow money? Reply with quote

I've been thinking about this quite a bit recently. Obviously a mortgage is slightly different, firstly because it is unlikely anyone can buy a house without borrowing, and secondly because houses do seem to rise in value.

However most things aren't like that. Buying a car for instance will be a depreciating investment. I can understand a business borrowing money because they're using that to try and increase earnings, thus affording both the loan + the interest payments with a bit left over as profit.

Most individuals are on relatively fixed incomes though so borrowing money is unlikely to see income rise, unless perhaps it is invested in training, so borrowing is going to leave you considerably worse off than if you had been patient and bought things with cash.

Am I missing something?
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shonnadave16
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PostPosted: Sat Apr 24, 2010 1:43 am    Post subject: Reply with quote

borrowing isn't that bad especially if you are able to buy one very important thing and you don't have enough cash to buy it.
what is important, is that once you borrowed something or anything you must pay and know how to return it.

borrower - someone who receives something on the promise to return it or its equivalent
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barbaragreer02
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PostPosted: Sat Apr 24, 2010 5:39 am    Post subject: Reply with quote

People borrow money because of shortage in amount needed to buy they wanted. Or they don't have any amount in their electronic card to claim. or when they need large amount for investments, whatever...when they need the money urgently and they do not have any ready amount for that.
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paul
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PostPosted: Sat Apr 24, 2010 11:49 pm    Post subject: Reply with quote

Couldn't agree more with your post, Adi.

Obviously people borrow for different reasons but to my mind there are many that borrow simply because they want things that they are not yet able to afford, regardless of how that doesn't make sense in the long term financially.
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Kay
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PostPosted: Sun Apr 25, 2010 12:55 pm    Post subject: Reply with quote

I read a book ages ago called "Why the Poor Pay More". It outlined and discussed a lot of cases where people who can't afford to buy something then buy it anyway on credit and end up paying a lot more for it.

There's another reason why people borrow. They get out of their depth for various reasons - maybe they don't understand cash flow, or maybe they want too much too soon. And then they see additional borrowing as a way to get out of the hole they've dug themselves into.
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PostPosted: Sun Apr 25, 2010 2:05 pm    Post subject: Reply with quote

I am not even sure if I fully understand the question.

For the majority of people, they borrow money because they don't have the money to purchase something they want, but want to buy it regardless.

I remember when I was in my twenties, I would borrow money and go overdrawn constantly to buy what I now consider luxuries, like a nice jacket.

Nowadays, I live a debt free life, both in personal and business life - except mortage. So unless I really had to I would not borrow.
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adigaskell
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PostPosted: Wed May 05, 2010 2:37 pm    Post subject: Reply with quote

Interesting post by Seth Godin today on this issue.

http://sethgodin.typepad.com/seths_blog/2010/05/consumer-debt-is-not-your-friend.html

Quote:
Here's a simple MBA lesson: borrow money to buy things that go up in value. Borrow money if it improves your productivity and makes you more money. Leverage multiplies the power of your business because with leverage, every dollar you make in profit is multiplied.

That's very different from the consumer version of this lesson: borrow money to buy things that go down in value. This is wrongheaded, short-term and irrational.

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paul
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PostPosted: Wed May 05, 2010 4:53 pm    Post subject: Reply with quote

That strikes me as a fairly sensible, if not a little simplistic, way of summarising it.
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PostPosted: Fri May 07, 2010 1:30 pm    Post subject: Reply with quote

Adi and Paul, most of them borrow because they're idiots. That's, quite simply, the truth.

Correction: Make that greedy, self-indulgent idiots who are too stupid to distinguish between urgent need and instant gratification of desire.

Some are genuinely of the one brain cell variety - the common or garden idiot. The others would likely blame their parents/their education or something else for their inability to understand basic finance. "Duh, I borrowed the money to buy a new car. What's there to explain? You thick or somewat?"

The only good reason to borrow is if it'll make you more money or save you money. For example, you have a safe investment of 100K at 6%. You need $50K to invest in your business. You can either pull money out of your investment or re-mortgage at 3.5%. You sit and do the maths and if it works out cheaper for the re-mortgage (including arrangement fees etc) you borrow money on your house.

But that's too complicated for them. "You not suggesting I use a calculator, are you?"
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PostPosted: Wed May 26, 2010 3:27 pm    Post subject: Reply with quote

Smooth wrote:
Adi and Paul, most of them borrow because they're idiots. That's, quite simply, the truth.


Thats a little harsh Smooth.

Marketing plays a large role in making people WANT MORE than they can afford. In some financially less affluent places in Africa they save up their money so at the end of the week they can buy a family bottle of Coca Cola!

Emotions and feelings are not separate from the buyers decision making process. It is not a rational decision.
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paul
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PostPosted: Wed May 26, 2010 8:43 pm    Post subject: Reply with quote

If marketing is swaying people to buy things they can't afford, doesn't that make them idiots?
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adigaskell
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PostPosted: Wed May 26, 2010 9:01 pm    Post subject: Reply with quote

I've got a sudden urge to buy a holiday in the Lake District Shocked
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Kay
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PostPosted: Wed May 26, 2010 9:59 pm    Post subject: Reply with quote

Don't start doing subliminal advertising on me again, Adi. That cost me enough ants the last time. Very Happy

Paul wrote:
If marketing is swaying people to buy things they can't afford, doesn't that make them idiots?


No, Paul. It doesn't make the advertisers idiots. It's business - and we're all in business to make money. Aren't we?

No one says we have to believe the advertisers or to be convinced that we really must have this thing we can't afford right now.

Idiocy? No. Being easily led or being swayed by adverts, yes, that's pretty stupid.

Given that most of us on this discussion know what's going on, I'd raise the question of ethics. And I believe very strongly in doing business in an ethical way. Of course what I think is "ethical" is my own value judgement.

Is it ethical to persuade people to buy what they can't afford - and what may well cost them dearly in the future?
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Last edited by Kay on Wed May 26, 2010 10:06 pm; edited 1 time in total
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Kay
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PostPosted: Wed May 26, 2010 10:04 pm    Post subject: Reply with quote

Sorry, Paul. I may have misunderstood what you were saying. Who is the idiot? The advertiser or the person who believes it?
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PostPosted: Thu May 27, 2010 12:11 am    Post subject: Reply with quote

The person who spent the money because they saw the advert and yet couldn't afford the product.
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