Remaining debt-free in today's society is almost impossible for most people. Homes, automobiles and other expensive items cost more than the typical person can afford without acquiring a loan. There are positive and negative consequences when you finance purchases. You can mitigate negative consequences by only borrowing what you need, and by paying your bills on time.
Borrowing Money Affects Your Credit Report
Lenders typically report your loans to the credit bureaus. Credit bureaus keep files on individuals, which provide information to lenders about your credit habits. The bureau assigns you a credit score that lenders use to help decide how much credit to offer you, and to determine the interest rate for loans. Individuals with high balances on their accounts can find it difficult to receive new loans, because high balances lower your credit score even if you make your payments on time. Your balances can account for as much as 30 percent of your overall score, according to the Fair Issac Corporation.
You Pay Interest
Lenders make money by charging you interest on your account balance. The amount of interest you pay depends on the lender, the type of loan and your credit score. Mortgages typically have lower interest rates than open-ended accounts because they give the lender a longer amount of time to collect payments and, since your home serves as collateral, there is less risk to the lender.
Debt Obligation
When you borrow money, you obligate yourself to paying it back. Lenders will typically work with you on your payments if you suffer a financial setback and temporarily cannot make your payments. However, lenders will eventually place your account in collections if you do not pay. Read all of your loan documents and lender disclosures before accepting the loan, so you know your obligations. If you find that the terms of the loan are not acceptable, think twice before accepting the money.
Considerations
Loans provide consumers with the means to buy things they cannot afford at the time of purchase. The problems begin when you accept more loans than you can easily repay. The Fair Debt Collection Practices Act contains the regulations that debt collectors must follow when attempting to collect a debt. Collectors who violate FDCPA regulations, such as contacting you between the hours of 9 p.m. to 8 a.m., harassing you or making false statements, are subject to court judgments and fines.
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