Question

Under what circumstance(s) would you borrow money? What economic factors would lead to you borrowing more or less money?

Answer 1

The circumstances were::

1. To buy assets

When buying a car, a motorcycle, a house etc. requires sums of money that a person may not have, so borrowing becomes a must.

2. To pay for losses made

Needed to borrow money to repay the losses.

3. To pay off a pressing loan

If the lender is a any annoying friend you might as well borrow from the bank and replace the annoying friend.

4. To pay for medical expenses

An emergency normally happens in case of medical needs. This could be a big expense and totally unexpected.

5. Living beyond one's means

For whatever reasons people live beyond their means! So many people earning well (and knowing that they are lucky to be earning that amount) buy latest gadgets, cars, watever they needed.

Economic factors which lead to borrowing money were:

1. Debt is usually less expensive than giving up equity.

When raising funds for your business, giving up equity is almost always more expensive in the long-run than taking on debt. Equity costs you a portion of your business, forever.

2. Debt can be cheaper than your opportunity cost

If the opportunity is right, debt is often the better strategic choice. You can profit from debt and open up new growth channels.

3. Paying interest on debt reduces tax burden.

The cost of interest reduces your taxable profit and, therefore, reduces your tax expense. The effective interest you’re paying is lower than the nominal interest

4. Debt encourages discipline.

Debt brings with it a discipline about spending and investing that can help your company, especially in its formative and growth years.