Financial Literacy for Everyone
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Reasons to borrow money

There are many reasons why people borrow money – some are good reasons, and some not.

You could borrow money if you want to buy an expensive item that is part of your long term plan. A house is a good example. Very few people can save enough money to buy a house. They borrow money from the bank to buy the house. Every month they pay back the monthly instalment. They do this for a number of years until the loan is paid off. Their house is then an asset that they own.

It is not a good idea to borrow money to buy something that you use up, such as food or clothes. You may still be paying for the loan long after the item has been used. Therefore, to borrow money to buy shoes does not make sense, because the shoes might be worn out by the time you have paid off the loan!

Sometimes emergencies happen, such as a car that breaks down. Your only option might be to borrow money to fix the car. However, you should rather plan for emergencies or take out insurance to protect you against such emergencies.

Exercise: Which of the following do you think are good reasons to borrow money?

  • To buy a house
  • To go to a festival
  • To buy a lounge suite
  • To buy a matric dance dress
  • To buy an iPod or
  • To pay for an emergency operation.

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