The availability of credit and your ability to borrow can be dependent on several economic conditions. Economists worry, however, that excess borrowing can have long-term consequences. Lending institutions may extend credit to people who are not able to easily pay, and individual circumstances can and often do change. It is ultimately up to the individual to think about the long-term consequences of borrowing too much.
Your Credit Score
Borrowing and paying regularly on that loan can help you establish and then increase your credit score, which is important for your financial future. However, even if you make all of your payments on time, using up your available credit can negatively impact your score. Additionally, just applying for credit can have a negative impact, as each inquiry will be noted on your credit report, but its impact will depend on the circumstance. Applying for several credit cards is generally more negative than shopping different lenders to get the best rate for a car loan.
Being "Upside Down"
If you are “upside down” on a car or home mortgage, it means you owe more than its current value. This can happen if you did not put enough money down when you purchased the property, particularly with a vehicle. With a home, taking a loan against your current equity, thus increasing the amount you owe, can lead to an upside down condition. It can also happen if economic times shift to such a degree that home values diminish.
Risks with Secured and Unsecured Debt
A secured loan is when you borrow money based on, and secured by, a piece of collateral. If you borrow money to purchase an automobile or home, that is a secured loan. If you fail to make payments, the lender can exercise its right to repossess or take the collateral. A credit card – that is not secured or guaranteed by a savings account – or a bank line-of-credit are examples of unsecured loans. The interest rate is commonly higher for these loans because of the greater risk to the lender. Problems paying on either type of debt can severely damage your ability to borrow, as well as add other expenses, such as interest, late fees, collection charges, or even legal fees.
The National Economy
You might believe that your borrowing simply affects your household, but borrowing habits cumulatively affect the national economy. As the debt of each household rises closer to income, an overall decline in national economic health can occur because it can also limit spending. Additionally, rising debt can lead to increasing rates of default, which is also a negative factor. It can also affect an individual’s ability to save for the future, which can also strain the national economy.
- NPR: Why do We Borrow So Much? April 28, 2008
- NPR: Making Changes to Head Off Credit Disaster. April 29, 2008
- The Finance Owl: Secured Vs Unsecured Loans
- Advantage Credit Counseling Service: Secured –vs- Unsecured Debt
- NPR: Being ‘Upside Down’ and Other Car Loan Hazards
- Financial Industry Regulatory Authority: Getting Ready to Invest – How Your Credit Score Impacts Your Financial Future
- Federal Reserve Bank of San Francisco: Consumers and the Economy, Part II: Household Debt and the Weak U.S. Recovery. Mian, Atif and Sufi, Amir.
- Congressional Research Service: Social Security, Saving, and the National Economy. Cashell, Brian W. December 29, 2009.
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