The Ins and Outs of Why People Borrow Money
Loans are a fact of life, but it is sometimes to easy to indulge on credit. But managed carefully, loans can help individuals and businesses achieve their goals.
The modern world is expensive. Even the U.S. Mint is feeling the pinch. It costs the federal government more money to make nickels and pennies than the face value of those coins. It's not surprising that people borrow money to buy homes, get an education, replace the old clunker of a car or for emergencies of all types.
Types of Loans
The type of loan taken out largely depends on the reason for the loan. Buying a home requires a mortgage obtained from a bank or mortgage broker. These are normally long-term loans, sometimes up to 30 years or more. Homeowners pay interest, but as the loan is paid down the equity in the property increases. If a home is kept for a long period of time, the actual value of the home usually also increases. The equity and the increased value give the homeowner flexibility for line-of-credit loans or second mortgages.
Car loans are shorter, usually up to 60 months and may be obtained from a bank, a dealership or other sources. Some homeowners may opt to use their line of credit for a car loan. Unlike a home, cars depreciate over time, though some models hold their value better than others.
Loans for education originated with the G.I. Bill after World War II, signed into law by President Franklin Roosevelt, in 1944. Returning servicemen were able to go college, a privilege that had previously been limited to the wealthy. Student loans are offered by banks, or through colleges and private lending firms.
Emergency loans are those taken for something unexpected. Banks and credit unions usually offer short-term loans. Another option for borrowers is payday loans, a simple way to acquire short-term funds when caught short between paychecks.
Using Money to Make Money
Borrowing money to start a business can reap big rewards. Usually it takes more money to get a business off the ground than most people have lying around. Established businesses will also take out loans in order to purchase or lease necessary equipment, to secure property, to stock inventory and to increase working capital.
One example would be a seasonal company that does most of its business during the December holiday season. Said business could take out a short-term loan to stock up on inventory prior to the season and pay back the loan after the season ends. Working capital loans are usually short-term, meant to cover day-to-day expenses while the venture gets off the ground, some with a higher interest rate.
Student Loan Debt Launches Daring Idea
The cost of an education in 2012 is much higher than it was even just 30 years ago. Students often graduate owing tens of thousands in student loans that will take them years to pay off. Niagara Falls, N.Y., is conducting an experiment with the upcoming class of 2013. The population in this city was around 100,000 in the 1960s. City fathers fear it will go below 50,000 in the next census. The population is aging, as younger folk move out in search of more opportunities.
Seth Piccirillo, the director of community development, came up with the idea to pay off a portion of student loans to attract young professionals. In exchange those professionals would need to move into the downtown core, either renting an apartment or purchasing a home. Similar experiments are going on in Kansas, where Rural Opportunity Zones have been established in some of the more rural areas.
Loans can act as a cushion, softening the blows of the unexpected twists and turns of life. They also can serve as a pathway to improve standard of living, increase knowledge and make dreams a reality. Managed well, loans can pay for themselves several times over.
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