We are living in an era of increased financial accessibility. Numerous banks, credit card companies, other financial lending institutions, etc. Whenever we need a loan or credit, we can apply for it; the lenders will quickly run a credit check and disburse the amount in our account. Simple, isn’t it? As the credit is easily available these days, the people overborrow and get into a debt trap. Taking multiple loans or using too many credit cards can accumulate debt and lead to severe consequences. Here, we discuss why you should avoid over-borrowing and prevent yourself from getting into serious implications.
Avoid Over-Borrowing: Risks and Consequences
The ease of securing a loan has often led to over-borrowing. Applying for too many loans without ensuring comfortable repayment can result in a debt cycle. Be mindful of the following consequences before applying for credit.
1. Debt Trap
One of the main risks of borrowing money is the possibility of getting into too much debt. Though loans can fulfill your goals and provide short-term relief, in the long run, it will become difficult for you to repay all the debts. If you are not cautious, you will end up piling up debt, leaving you financially struggling. Hence, without evaluating your existing debts and checking whether you will be able to repay all, do not apply for debt.
2. Impacts Savings
Paying too many debts will never allow you to save for a bright future. Saving for your future, like generating a retirement fund, emergency fund, etc., is essential. Due to the high amount or number of debts, most of your earnings will go into loan repayment. You will be unable to contribute towards your retirement fund or savings account. This may also mean future insecurity.
3. Risk of Default
Numerous debts may come with the inability to pay loans due to lack of money or difficulty tracking payment dates and forgetfulness. Both these situations can lead to default. A default is extremely bad for your credit health.
4. Can Lower Credit Score
If you want to maintain your credit score, then be very wary of your credit repayment. When you borrow money and repay the same timely, it will build a good credit repayment history, spiking the credit score. However, if you take a loan and miss or delay a payment due to too many debts, you will drop your score. A credit score drop leads to many negative consequences such as loan rejection, credit on high interest, unfavorable loan terms, etc.
So, when applying for a new credit, ensure your ability to make timely payments and avoid excessive borrowing.
5. High Interest Rates
Sometimes, when lenders offer quick loans, especially unsecured ones, they levy too much interest on them. The convenience of quick approval may be negated by the fact that it charges a high interest. If you are enticed to take a loan that is easy to acquire, you will need to pay huge interest in the long run. Due to this, the borrowers pay more than what they borrowed as they build up interest over time. So, be wary of this fact and always check the loan interest rate well before getting one.
6. Mental Health Disturbance
As mentioned earlier, loans are effective in providing instant goal fulfillment. However, accumulating the same or not being able to pay can lead to immense stress and mental health disturbance. The constant pressure of paying the debts may upset your health and wellness. You can have anxiety issues, and your family can get disturbed, too. Potential borrowers must take loans only if it outweighs their mental peace.
7. Impacts Long-Term Goals
If you keep taking multiple short-term loans, and keep paying their monthly dues, you will never focus on the larger goals of life. Consider an example. You take a personal loan for going abroad for a vacation. Then, you take a car loan for purchasing a car. You also take a loan for buying jewellery. Will this not impact a long-term goal like buying a house or starting a business? Other monthly commitments, like personal loans, car loans, etc., will not keep the home loan option feasible. Therefore, always weigh the short-term benefits and how these can hinder long-term goals.
Wrapping Up
Due to the soaring financial flexibility, borrowing money has become way easier than ever. The borrowers are tempted to apply for loans to meet immediate goals and expensive financial aspirations. Though loans are a wonderful avenue to support your necessary financial objectives and allow you to lead a stress-free life, too much of it can put you in trouble.
Become a responsible borrower and assess your needs v/s repayment well. So, evaluate your financial requirements, check whether these are absolutely necessary, consider the potential risks, and then apply for the loan.
FAQs
1. What is over-borrowing?
Ans. When you borrow credits or loans beyond your borrowing capacity, it is called over-borrowing. It may have many negative consequences.
2. What is over-borrowing in business?
Ans. A business is overborrowed when it has too much debt and less cash flow or equity. Also called overleveraged, the company will have trouble making repayments of interest and principal amount and get into debt burden.
3. Why you should avoid over-borrowing?
Ans. Over-borrowing can lead to stress, repayment default, debt trap, low credit score, high-interest rate, long-term goals disturbance, insecure financial future, etc.
4. How does over-borrowing lead to a low credit score?
Ans. When you overborrow and are unable to repay the same timely, you will upset your credit score. Sometimes, you miss or delay payment due to too many debts. This can decrease your score.
5. Should I focus on a loan that fulfills my short-term goals or a long-term objective?
Ans. Striking a balance between the two will help you achieve both. Applying for too many small debts will keep you away from achieving the larger goal in life. So, take only necessary loans and preserve the savings and downpayment for the bigger milestone like buying a house.