Why do people borrow money?

[Reidy's Bottle Of Grecian]

The thing with buying it though Bruce is that you can always sell it to recoup the equity, and over 25 yrs it is going to rise in value, yes rent is lower now but the whats the chances of it remaining at that amount for 25yrs ? Tie in the mortgage for as long as poss while the rates are low, it's about the only thing that has worked to my benefit financially, as I've said prev. I always lost out on exchange rates when working abroad (every feckin' time with the major one being about 30-40%), with the mortgage/ house though we bought just at the right time, got a 1st time buyers rate for 2 years, then a fixed rate for 3, then when that ended we tied in for 10 years.
We were lucky with timing really as if it had all been 12 months later, the house would've cost almost double, then the rollon of the fixed terms when we came out of the 3 yr fixed would've seen us incurring a hike in interest rates and not able to tie in for as long.

If you have extra disposable income though, the 'australian mortgage' as it is sometimes called (virgin do one as well) would work to your advantage, as your savings go into the mortgage account to offset the interest, the claim was that borrowing the av. amount and being payed the av. amount each month, making the basic payment but having your salary sitting there in the account(knocking off interest), would reduce the mortgage from 25 to 19 years, for someone with nouse regarding money it seems ideal, however for the must haves it's suicidal because you can always draw the money out to take you up to your original amount that you have borrowed, I know of people that have them and although they pay their mortgage each month, by the end of each year they have spent it again on holidays /cars/ dvd's/ nights out. I always think that eventually things will catch up with these types but it just doesn't seem to happen.
I would put a stop to individuals running up these huge debts then going bankrupt to wipe the slate clean, look at their spending habits and say "sorry but you knew what you was doing and you will pay it back, even if it takes the rest of your life living on the minimum to survive, you will pay it back, you won't jack in work to go on the dole to avoid it, cos if you do you will work for your dole cleaning streets etc" it's pretty obvious when they have done it purposely as everyone does shiz with cards these days, so easy to view someones spending habits.

 

[Reidy's Bottle Of Grecian]

So far away from the real world some people.

I think he's talking about people doing it for material things though tbh, things that they don't necessarily need, of course any of us could have something go wrong that we then have to borrow for, such as a whole new heating system, or a car failing mechanically and needing to be replaced, these are unforseen things, but folks is equiping their pads with all the latest tech. and no real ability to pay it back/ paying double in the long term cos they have to have it right now.
couple i know borrowed 60k for the house, by the time they moved out they had lumped 30 odd k on the mortgage, spent on hols cars etc etc, they sold for 120k and thought it was ace that they had 30k extra, they moved to 1 for 180k, what they dont get is that the 30 odd k extra that they lumped on the mortgage, and then remortgaged again for 25 years, they will be paying for those things for 25 years, and paying for that long since gone car how much ? much more than the 10k they paid for it (and lost about 5k when they part-ex'd for the next one).

 

[Neiler]

Simple the innate human instinct for greed!

 

[chicoazul]

Next up from BruceWayneCORP: how many floggings does it take before your manservant increases productivity by 10%.

 

[manxtoffee]

It's the Western way.. Buy now pay later.

 

[Bruce Wayne]

Next up from BruceWayneCORP: how many floggings does it take before your manservant increases productivity by 10%.

Alfred generally doesn't require floggings. He's very good.

 

[chicoazul]

Superb work sir.

 

[McBain]

Its like asking why people smoke. Expensive, smelly, but cool as ****.

My point is: I'm going outside for a smoke.

 

[Bruce Wayne]

Interesting blog here

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

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.

 

[Reidy's Bottle Of Grecian]

when a business borrows money though, it may increase productivity but it's highly unlikely that the item that the business borrows money for will rise in value, unless it is property. Any kind of equipment, be it machinery, computer , vehicle, will lose from the minute that you buy it, a business can obviously offset this against it's tax via depreciation, but if the asset rises in value then tax will be payable on the profit.

 

[Bruce Wayne]

Sure but if you are a business that borrows money to buy a machine (for instance) then presumably this is done to increase production of a product that will hopefully increase profits enough to pay back the loan with money left over. You're not investing in the machine as opposed to what it can produce.

I suppose you could put a value on the enjoyment you get from buying a playstation now rather than later, or a utility in economics terms, but it starts entering muddy waters then.

 

[pfim]

Interesting blog here

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

Yes, very simply, this is why businesses SHOULD borrow money. To increase revenues. Think about that and relate it to what many football clubs are doing.

I learned my lesson the hard way and it took me years to get out of credit card debt. I could always handle the monthly payments, but they're such a drag on your disposable income...it's just not worth it. Now I have one credit card which I use mostly to book travel and for online purchases, as most credit cards offer better consumer protection than other methods of payment. The card is paid off almost immediately after I make the purchase.

I bought a house last fall, mostly because we were renting a similar space for the same amount as the mortgage, taxes, insurance etc. There are many factors that go into the rent vs buy debate. As someone noted earlier, while your rent might be 600 now, it won't be in 25 years from now for the same space...or even 5 years from now. But buying is not always the right choice.

As far as auto loans go, I have a family of 5, so we normally have one reliable vehicle that we finance, and then one vehicle I pay cash with that I drive to work and back. We NEVER buy new cars. EVER. I don't know what the used car market is like in the UK, but I can usually find a high mileage car that I get 3-4 years out of for $3-4k US. I may spend more in repairs, but I never spend more than what a new car would cost me. For the family vehicle, we normally buy something that's 3-4 years old, that has already depreciated close to 50% of it's original sticker price.

To answer your question, people borrow money because it's more difficult to save it! There are people that just can't help but spend the money they make. They'd rather purchase a TV and pay it off over 6 months, than save for 6 months and buy the TV, just because they KNOW they won't save that money to buy the TV, they'd spend it anyway.

 

[Tennessee Blue Mike]

Nope, a purely personal question. I'm looking into house buying at the moment so am crunching numbers on whether it is better financially to rent or buy, and renting is coming out on top thus far. It seems to me that the financial situation is even worse for regular loans so I'm wondering why people do it when it makes such little financial sense.

Renting in the current environment would seem to be the most viable option and investing the difference. The foreclosure assault is far from over
as Alt-A loans are now starting to reset. Chances are very good the inflation tiger is set the raise his ugly head as a manipulated low interest environment has cause all sorts of problems. I see good value for you Bruce in the next 5-10 years when the dust has settled somewhat on Home values perhaps giving you a significant down payment over a higher interest rate on a bargain basement home.

 

[Tennessee Blue Mike]

Interesting blog here

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

Good blog. Dave Ramsey is a alumni of mine from the University of Tennessee and a big proponent of the debt snowball. Although he doesn't agree with me on precious metals holding value and the ultimate decline of the euro, pound and Dollar, which is now set to devalue everyones wealth in the next decade or so if we aren't vigilant to cut spending(Something the government calls inflation).