The Pitfalls in Borrowing Money
A. The dangers or risks of borrowing money
B. Background of borrowing/ responsibilities of borrower
C. Thesis Statement: Borrowing money creates a profile of financially-at-risk individuals that shall be dependent on the characteristic of the borrower, who may the tendency to mismanage and misuse their credit cards.
II. Counter-Arguments
- There are advantages and disadvantages in borrowing money through loans and credit cards.
- The financial problems of the borrower are easily resolved by seeking financial assistance from loans and credit cards for payment of mortgage, car loans, student loans and other emergency needs.
- Since credit card charges are unsecured, the credit card companies impose high interest rates and will become burdensome if the credit card holder does not pay in full.
- Many of the credit card holders are unable to pay off their debts due to the interest charges that are skyrocketing which have become greater that the cost of what they actually purchased.
III. Your Argument
- A borrower must be able to make a personal assessment of his or her own financial capacity.
- The first option is to borrow from family members, relatives or friends rather than go to a lending company or financial institutions to avoid paying high interest rates.
- The first thing for a borrower to consider is the type of loan to be taken, whether long term or short term; and the means to pay the monthly dues.
- The proliferation of credit cards and the convenience of paying with just one card and no cash offered many opportunities for consumers when they want to make a purchase.
- Credit cards may give temporary solution to provide for the needs of consumers by developing negative emotional response such as impulsivity, compulsivity and materialism among consumers.
- The problem lies in the manner how these consumers utilize their credit limits and to observe discipline when it comes to their spending habits.
- Credit cards have stimulated the spending behavior of the public by giving them the concept of electronic cash.
- The tendency to mismanage and misuse their credit cards shall be dependent on the personal characteristics of the card holder or the borrower.
- Credit card holders must be aware of the economic repercussions in credit cards usage by developing financial literacy.
IV. Conclusion
- Borrowing money creates a profile of financially-at-risk individuals that shall be dependent on the characteristic of the borrower, who may the tendency to mismanage and misuse their credit cards.
- In order to avoid financial distress among borrowers and credit card users, there is a need to establish a connection between credit card use behaviour and credit card knowledge.
The Pitfalls in Borrowing Money
I. Introduction
When a person needs to borrow money as a start-up capital for a business or fund an existing one, the future borrow should consider all the options by considering the interest rates before borrowing money. Some people who are in need of emergency cash go their families, relatives and friends. On the other hand, some couples borrow from their own partners when the need for money arises. For emergency cash, the borrower can apply for a loan with commercial banks, finance companies and credit card companies. There are also lenders ranging from investors to government lending programs that are willing to provide instant cash loans for new business ventures. Some of these entities are leasing companies, private investors, state and local government lending programs and partnerships. A leasing company is a good alternative to a traditional loan since these companies will allow to “borrower to rent that assets that such person needs, as opposed to borrow the money to rent them” (Baldwin and Chambers 52).
Thesis Statement: Borrowing money creates a profile of financially-at-risk individuals that shall be dependent on the characteristic of the borrower, who may the tendency to mismanage and misuse their credit cards.
II. Counter Argument
There are advantages and disadvantages in borrowing money through loans and credit cards. One of the advantages of borrowing money is that the financial problems of the borrower are easily resolved by seeking financial assistance from loans and credit cards for payment of mortgage, car loans, student loans and other emergency needs. It is convenient to avail of credit cards with increased credit limits but may result to the borrower paying more than the amount he or she actually borrowed. It is imperative for credit card users to sort between various credit card companies that require acknowledgment of the fine print. Some of these credit card companies are wise enough to accelerate the interest rate to “1.5 percent in the event that there is a derogatory credit report that is shown in the record of the borrower” (Baldwin and Chambers 45). This may happen in case the borrower applies for a car loan and conduct a credit check based on the financial capacity of the borrower to pay. This is the time when the credit card company discovers the derogatory report of the borrower and decides to implement heightened interest rate. It is essential for credit card users to study their monthly statements of account to avoid increased interests.
In the case of college students who do not have the means to pay expensive tuition fees, they have no choice but to apply for student loans. Aside from this, they are also faced with the problem of paying their credit card bills. Due to the rising cost of college education, the “financial assistance that had been extended to students tripled in cost when federal and state financial aid policies shifted away from grants to loans” (Pinto and Mansfield 22). Further, the credit card debt has increased the probability of student loan for many of these college students. This is based on the reports that most college students or “70 percent of them have an average of two credit cards” (Warwick and Mansfield 617). The report of the “2002 National Student Loan Survey revealed that the college students who use their credit cards to assist them in their education have an average balance of $3,400” (Pinto and Mansfield 22). In fact, there are about 7 percent to 8 percent of them who are having a difficult time to pay their educational debts and one way to solve this problem is seeking relief through bankruptcy or default. Although there are some parents who borrow money in order to provide college education to their children, the government has resolved this problem by granting student loans. The reports have shown that students have been identified as “financially-at-risk on the basis of the personal traits, especially of the fact that they have misused or mismanaged their credit cards” (Pinto and Mansfield 23). Some of the distinguishing characteristics of students who have been classified as financially-at-risk are those whose credit card balances are over $1,000 or more; have defaulted in paying their credit cards by more than 2 months; have used up the maximum limit of their credit cards; and they seldom pay their credit card bills on time or fail to do so.
For credit card users, it is vital to take into consideration the Annual Percentage Rate (APR) of the credit card that they are using. Based on the report of the Bank rate.com, during the first week of January 2013, the “APR has increased from 14.56% to 15.31%” (Herron, “3 Reasons Your Credit Card APR is Crazy High”). The three main causes of the high interest rate include the type of “debt or loan taken, government policies and the credit card holder” (Herron, “3 Reasons Your Credit Card APR is Crazy High”). The interest rate of credit cards is accelerated because the debt is unsecured. This is unlike the mortgages which use the house and lot as collateral in the event that the borrower defaults or the car loans that are secured by the vehicles purchased by the borrower. As a result, the default on the part of the credit card holder to pay his or her monthly dues will result to higher interest rates.
The recent legislation called the Credit Card Accountability, Responsibility and Disclosure Act of 2009 or the CARD Act had decreased the possibility of credit card companies to earn profit since no interest rate increased was allowed for the first year. Aside from this the increased interest rates shall not be made applicable to the new items on the bill. There is also a limitation on the penalty charges and other fees have been eliminated. “The CARD Act has also given restrictions on the payment and billing practices of credit card companies” (Herron, “3 Reasons Your Credit Card APR is Crazy High”).
The final cause of high APR is the credit card holder’s ability to pay on time. There are several people who carry the same credit cards but have different interest rates. Some of the credit card holders who pay on time are given the interest rate of “10% to 15%, whose credit scores are above 720” (Herron, “3 Reasons Your Credit Card APR is Crazy High”). For those credit card holders who scored 680 to 720 have an APR rate of 15% to 20%. On the other hand, those credit card holders that have “620 to 680 credit score shall be given the APR rate of 20%”, which is the highest rate imposed by credit card companies (Herron, “3 Reasons Your Credit Card APR is Crazy High”).
Based on my personal interview with financial expert Ric Edelman, who is the Chief Executive Officer of Edelman Financial Services LLC and has written the book “The Truth About Money” and also the host of the PBS program carrying the same title, his best advice for credit card users is to pay the balance in full every month to avoid paying high interest rates. Since credit card charges are unsecured, the credit card companies impose high interest rates and will become burdensome if the credit card holder does not pay in full. Many of the credit card holders are unable to pay off their debts due to the interest charges that are skyrocketing which have become greater that the cost of what they actually purchased. As a result, the high interest rates will incur more debts if the credit card holder fails to settle the full outstanding balance of the monthly statement.
Before borrowing money from family, friends, boyfriends, girlfriends, the borrower must make sure that the loss of that money shall “not affect the lender’s future or lifestyle” (Knowles and Castillo 291). If the borrower intends to borrow money directly from his or her parents, it is essential to ask them to co-sign the loans to obligate them to the debt but will also affect their financial transactions. If the borrower intends to borrow a significant amount of money, the lender should be aware of the purpose for borrowing the money such as expansion of business. However, the best way to secure the debt is to “put up a property of the borrower such as the house, car or jewellery as collateral” (Knowles and Castillo 291).
In the case of the American government, the “federal debt, budget deficits, poverty rates, trade deficits are near the record levels of the U.S. history” (Mason 43). The federal government has gone bankrupt so the government is hardly in position to make large investments that will be necessary to ease the poverty rate. The reputation of the U.S. is not a good role model to its citizens in terms of financial stability due to its “unfunded liabilities such as Medicare and Social Security” (Mason 43).
When applying for loans to pay for mortgages and car plans, it is essential for the borrower to make sure that he or she has the capacity to pay the monthly amortizations. The basic elements that have to be considered for the approval of mortgage applications consists of 4 Cs: “First is the Collateral or the property value and equity; second is the Capacity or income of the borrower; thirdly is the Credit or the credit score and pay history of the borrower; and; finally, the Character or the overall stability of the borrower” (Vermillion 170). The same principle applies when applying for a car loan.
The cchurches should be allowed to borrow money for the “purpose of giving them economic empowerment” (Reed 26). The objectives of the church are mainly concentrated on providing assistance for charitable purposes. The church is considered as a significant economic institution since they receive contributions and donations from benefactors. As a non-profit institution, the churches will only be able to sustain its programs if it will be allowed to borrow money for economic empowerment.
III. Argument
A borrower must be able to make a personal assessment of his or her own financial capacity. The first thing for a borrower to consider is the type of loan to be taken, whether long term or short term; and the means to pay the monthly dues. Borrowing money is from friends and family is personal in nature. The first option is to borrow from family members, relatives or friends rather than go to a lending company or financial institutions to avoid paying high interest rates. It is important to consider that the lender is easy to deal with, since it is the borrower who is asking financial help and has the obligation to pay the debt based on the agreed terms of the lender and the borrower. Some relationships may be strained in the event that the borrower defaults in paying his or her debt to a family member, relative or friend.
The proliferation of credit cards and the convenience of paying with just one card and no cash offered many opportunities for consumers when they want to make a purchase. The problem lies in the manner how these consumers utilize their credit limits and to observe discipline when it comes to their spending habits (Mansfield, Pinto and Robb 1). Credit cards must be used wisely by consumers after causing an economic and social issue due to the accumulation of liability of the American people.
Some of the vulnerable groups including college students, senior citizens, and disabled citizens have relied on credit cards to support their needs. Many college students have represented the majority of credit card users by becoming independent consumers by using credit cards not just for educational purposes since they are lured to buy the latest gadgets that offer new technology.
These are just some of the many social and economic issues brought about by credit cards which bring positive and negative effects to consumers and the entire community. While credit cards may give temporary solution to provide for the needs of consumers, credit cards develop negative emotional response such as impulsivity, compulsivity and materialism among consumers (Mansfield, Pinto and Robb 5). These emotions will determine the credit card behavior on repayment of debt, credit card dues, misuse and keeping two or more credit cards.
Studies revealed that the overwhelming use of credit cards come from college students who represents majority of the sample population. The result does not come as a surprise since the credit card usage and spending patterns of American college students have become one of the primary economic issues. In fact, several colleges and parents of these college students have become public policymakers in order to minimize the problems in relation to the college student credit debt (Mansfield, Pinto and Robb 8).
Credit cards have stimulated the spending behavior of the public by giving them the concept of electronic cash. Hence, the tendency to mismanage and misuse their credit cards shall be dependent on the personal characteristics of the card holder or the borrower (Rast 25). It is important for the credit card holders to be aware of the economic repercussions in credit cards usage by developing financial literacy.
IV. Conclusion
Borrowing money creates a profile of financially-at-risk individuals that shall be dependent on the characteristic of the borrower, who may the tendency to mismanage and misuse their credit cards.
In order to avoid financial distress among borrowers and credit card users, there is a need to establish a connection between credit card use behaviour and credit card knowledge. It is important to take into consideration the financial capacity of the borrower before applying for a loan or using the credit card. In addition, the borrower must be able to pay the monthly amortization dues for each loan from the beginning of the loan term until the end. The borrower should be consistent in paying off the dues to avoid steep interest charges. In the case of credit card users, it is imperative to follow the advice of credit card experts to pay the monthly balance in full to avoid the accelerated interest imposed by credit card companies due to the fact that the credit card debt is unsecured. The financial position of every borrower depends on his or her personal behaviour and attitude towards the debt. It is recommended to be methodical about loan and credit card problems by adding up the interest that the credit card companies are disclosing that the card holder will be making over several years if such individual only pays the minimum amount due each month (Berman 4). The best way to beat financial burden is to avoid the misuse of credit cards that may be characterized by bad faith, abuse of process, maliciousness, technicalities and fine print to enrich one’s self to the expense of other people. The borrower must take into account the long-term effects of the loan or debt to maintain good credit and avoid bankruptcy or insolvency. The goal of the consumer must always be geared towards how he or she can make good of all the financial obligations to be able to fully participate in the country’s market economy for the benefit of the entire nation (Berman 5).
Works Cited:
Baldwin, Patty and Lori Chambers. What You Should Know Before you Borrow Money.
USA: Moises. 2005. PDF File.
Berman, Daniel K. How to Borrow Money at Zero Interest. USA: Godet Press, 2013.
Print.
Herron, Jenna. “3 Reasons Your Credit Card APR is Crazy High”. Business Insider.com.
September 23, 2013. Web. November 25, 2013.
Knowles, Ronald A. and Chris Castillo. Small Business: An Entrepreneur's Plan. California: Cengage Learning, 2011. Print.
Mansfield, Phylis, Pinto, Mary Beth and Cliff A. Robb. “Consumers and Credit Cards: A
Review of the Empirical Literature”. Journal of Management and Marketing
Research 12. (2012):1-26. Print.
Mason, David S. The End of the American Century. New York: Rowman and Littlefield, 2009. Print.
Pinto, Mary Beth and Phylis. M. Mansfield. Financially At-risk College Students: An
Exploratory Investigation of Student Loan Debt and Prioritization of Debt
Repayment. NASFAA Journal of Student Financial Aid 36.2 (2006):22-32. Print.
Rast, Ben. “Credit Card Dangers”. Business & Economic Review 46.3 (2000): 24-27.
Print.
Reed, Gregory J. Economic Empowerment Through the Church. Michigan: Zondervan,
1994. Print.
Vermillion, Dale. Navigating the Mortgage Maze: The Simple Truth About
Financing Your Home. Illinois: Northfield Publishing, 2009. Print.
Warwick, Jacquelyn and Phylis Mansfield. “Credit card consumers: college students’
knowledge and attitude”. Journal of Consumer Marketing 17.7 (2000): 617 – 626.
Print.
