People may borrow money for various reasons, such as:

  • When they cannot afford to purchase an item they need or want.
  • Borrowing to buy a house—a mortgage—is common.
  • Planned borrowing, which is accounted for in a budget (such as vehicle finance or a mortgage), is generally manageable.
  • In contrast, unplanned borrowing, such as covering unexpected expenses like fixing a home appliance without emergency savings, can be expensive.

Borrowing money inevitably leads to debt. Although some argue that all debt is bad, a certain level of debt can be necessary or even beneficial.

  • “Good” debt can be useful in emergencies, enable purchases that would otherwise be impossible (such as a home), and help you progress in life—for example, through student loans.
  • On the other hand, “bad” debt can trap you into further borrowing to maintain your lifestyle, allow interest to compound dramatically if not repaid promptly, and incur opportunity costs by diverting funds away from long-term investments.

There are different types of loans available. Secured loans are linked to an asset (such as a home), which the lender can repossess and sell if you default. Unsecured loans do not require collateral; you borrow a lump sum and repay it in installments over time. Payday loans, intended to be repaid on your next payday, have shorter terms and typically carry much higher interest rates.