Especially when private individuals take out loans, the question of the meaning of the loan rarely arises. After all, the need for the short-term inflow of liquid capital that the borrower hopes to take from the loan is usually due to an absolute financial constraint. Such a bottleneck can arise, for example, due to the expected, but still necessary, high expenditure, for example if a car has to be purchased that is crucial for the borrower’s employment, modernizes the kitchen or new household appliances have to be bought. On the one hand, all of these expenses have in common the relatively high purchase price, but on the other hand the regular urgency of the purchase. This applies equally to commercial borrowers and companies. Here too, there is usually a financial bottleneck behind borrowing. Loans are often required in this context, but also for restructuring measures or cost-intensive investments, from which the company or the sole trader hopes a longer-term increase in sales.
Advantages and disadvantages of loan
Nevertheless, it can sometimes make sense to examine loans for their advantages and disadvantages, especially if the borrowing does not arise from direct financial needs, as in the above examples, but rather from a need for consumption, for example when buying a vacation or other consumer goods. In the following, this analysis will be carried out with regard to the general advantages and disadvantages of a loan. The main advantage, ofcourse, lies primarily in the at least short-term inflow of liquid capital. This inflow can also be used with great added value, for example in the above-mentioned cases of the investment.
The borrower will benefit from buying a car to tap a new source of income far beyond the scope of the loan. This also applies to loans taken out for the purpose of debt restructuring. Here, too, capital can be saved to some extent by taking out a loan. In addition to these significant advantages, a loan always has disadvantages. The most significant disadvantage here is probably the additional financial burden, which, aside from the cases described above, usually arises due to the interest burden on the loan. For example, the interest on some loans can be substantial. There is a risk of over-indebtedness, especially for borrowers, since loans have to be taken up again and again in order to be able to meet the high repayment rates.
What is the situation of the borrowers?
In addition, there is a risk of further tightening the borrower’s financial situation, since the borrower’s income does not increase, but the expenditure increases significantly due to the repayment rates of the loan. Another disadvantage is the psychological impact of the loan on the borrower. So he finally experiences an inflow of capital caused by the loan amount, which he can freely dispose of as he sees fit, but which ultimately does not arise from his personal performance. The borrower is accustomed to a level of consumption and life that he does not have.