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What are Some of the Worst Reasons for Borrowing Money

debt

For those that are heavily into debt they would probably assume that there are no good reasons for borrowing money.   Debt is debt, however there are circumstances where debt can be good but more often than not their reasons for borrowing are in usually not ones that can be really validated.   One of the most common and most common type of debt to have of course is credit card debt.  This is because the interest can be real killers.   The argument against using a credit card comes down to the belief that all consumer debt should be considered as bad debt.

Another type of debt that has become most common is payday loans.   If you think that credit cards are bad then take a look at the interest rate that is charged on payday loans as it usually centres out around 100% times higher than what mortgage rates are.   Originally payday loans were marketed as a means for emergency funds.   However, they have gotten way out of control and are utilized for almost anything that one could possibly think of.

The next way of falling into some really heavy debt is with the use of pawnshops.   Pawnshop interest rates can be just as exorbitant as credit cards and payday loans.   Chances are that you will lose the item that you have taken to the pawnshop simply because any extra money you get is just going to go against paying the interest offered to avoid the sale of your pawned item for one more month.

Another culprit for creating debt quickly is credit card cash advances.   The interest rate on these is even higher than other credit card uses.   Quite often the cash advance fee can be about 5% of the amount  borrowed.   Once this starts getting added to your credit card and you start getting the compound interest then there is probably no way that you’re going to get out of this unless you’re able to pay a lump sum against it.

Quite often individuals don’t utilize just one of these type of debt providers but use several and as a result they are on the brink of bankruptcy.  One of the other alternatives they will turn to is debt consolidation which is a quick fix but really is not a long-term solution.

Really the solution to prevent this sort of debt is to really give some serious thought before using any of the resources that is going to lead you down this path.   Most will not do without a credit card but learning how to use a credit card responsibly and avoiding payday loans and cash advances on your credit card are two big steps in the right direction.  Thinking that you can keep chalking up the credit card bills and just keep paying the minimum is going to keep you out of trouble may be so for the month that you’re making the payment in but it all begins next month over again ,and most likely with some compounded interest sneaking its way in.  So instead of the monthly balance going down you see a slight increase each month which seems to be never ending.

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Sam Seidman, CPA, CA, LPA
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