The Really Obvious Thing We All Forget When Borrowing Money

The Really Obvious Thing We All Forget When Borrowing Money

by THE INVESTOR

Have you ever wondered who you’re borrowing money from when you go into debt?  If you think you’re being given money by a bank or credit card company, think again.  In this piece I’ll explain in one sentence who is really lending you money when you borrow. The rest of the article will explain why it costs you more than you might think to take it.

Borrow now, and have less later

Loans, mortgages and credit cards are mechanisms through which you can borrow money. They don’t give you a penny to spend.  So where does the money come from? When you borrow money, you’re borrowing from your future self.  Loans and credit cards turn the impossible into reality, taking money you’ll have in the future and giving it to you today. It’s an almost magical process that clouds where the borrowed money comes from, and what it actually costs.

Let’s say you want to buy a new computer. You have three choices:

Save up to pay for it - Borrow the money - Steal the money, or the computer

Option 3 is the cheapest, but it has practical, moral, and spiritual consequences.  Option 1 requires you to live within your means, save the difference, and delay owning a PC until you can afford it. You may even buy a cheaper PC so you can own one sooner.  If you don’t like waiting and you don’t like compromise, you’ll probably go for option 2.

In some households, option 2 is the standard choice. Such people regularly borrow money to buy everything from the groceries to their summer holidays.  Borrowing might be done via: A credit card - A personal loan - Adding to the debt in your mortgage - Using a doorstep lender - A hire/purchase arrangement

All these options have advantages, costs, and consequences. Smarter borrowers shop around for the cheapest method. Others take the first loan that comes along. Finding the cheapest way to borrow is a subject for another article.  The key point is that all these methods have the same common structure: You borrow money - You must repay it 

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