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Good debt, bad debt (Types of borrowing products (Credit cards (require…
Good debt, bad debt
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Defaulting on a loan
If a loan is secured on an asset, such as a mortgage secured on a home, the borrower will lose that asset - their home - if they stop meeting the repayments. If the borrowing is in the form of a hire purchase agreement, the borrower will lose the goods - and will not be able to recoup the payments already made.
If the loan is unsecured, the defaulter will obtain a bad financial reputation or 'financial footprint', which means that they may be unable to get credit again. In the worse case, the person could be declared bankrupt.
Borrowing can help people to smooth out differences in timing between their income and expenditure. A negative balance at the end of the month is known as a deficit. Most people borrow money as a means of affording a substantial purchase, such as a house, a car, a TV or furniture.
The most common example is the mortgage loan: very few people are able to buy a house taking out a mortgage loan, which they pay back while they are living in the house. Although they will pay interest on the loan, interest rates are lower for a mortgage than other loans because it is secured on the property. This means that there is less risk for the lender, as it can sell the property to recover its losses in the event that the borrower defaults on the loan.
'Hardcore debt' is when an individual gets into difficulty repaying a loan and will then take out another loan to help repay that other debt.