Debt Finance Risks

Borrowing money causes risk, because you guarantee you will pay it back with your signature on the loan. Some loans have collateral, such as a home mortgage or a car loan. Loans such as credit cards or signature loans do not have collateral, but the lender has the right to come after you if you do not make your payments.

Payment Difficulties

One risk of taking out a loan is it may become difficult to make payments. You still must make payments if you become ill, lose your job or face other unexpected expenses. Although some lenders may work with you for a month or two if you contact them immediately on facing this situation, most will expect you to make your payments on time no matter what. If you cannot pay, they might sue, garnish your wages or repossess your collateral.

Loss of Collateral

If you cannot make mortgage or car payments, the lender has the right to take your collateral and sell it to pay off the loan. However, if they do not make the amount you owe, you are still responsible for any remaining debt on the loan. This means you might have your car repossessed and sold, yet still owe more money on it. It can be difficult to recover from a repossession on your credit and find a way to replace the item the creditor repossessed

Bankruptcy

Too much debt may lead you to file bankruptcy. Bankruptcy will negatively affect your credit score. In fact, you may not be qualified to borrow anything for several years afterward. Limiting your debt and paying it off as quickly as you can will help you to avoid bankruptcy. Paying cash for major purchases will protect them as well.

Limits Choices

Debt limits your choices. If you have too much debt you might stay at a job you hate so you can continue to meet monthly payments. It may make it difficult to pursue your dreams of opening your own business or buying a home because you cannot qualify for a loan. Additionally, debt will prevent you from effectively building wealth and investing your money. Set up a payment plan and work to get out of debt so you can pursue the things that are most important to you.