Borrowing

Borrowing refers to the act of obtaining money, goods, or services from another party with the agreement to return or repay them, often with interest, at a later date.
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Updated on Jun 3, 2024
Reading time 3 minutes

3 key takeaways

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  • Debt Financing: Borrowing is a form of debt financing where individuals or entities receive funds from lenders with the obligation to repay the principal amount along with interest.
  • Types of Borrowing: Common forms include personal loans, mortgages, credit cards, business loans, and bonds.
  • Interest and Repayment: Borrowing typically involves interest payments, which are additional costs over the principal amount, and follows a structured repayment schedule.

What is borrowing?

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Borrowing involves obtaining resources from another party with a promise to return them in the future, usually with added interest. This financial practice allows individuals, businesses, and governments to access funds or goods that they do not currently possess, facilitating various financial needs and investments. The lender provides the resources under agreed terms, which include repayment schedules and interest rates.

Key Aspects of Borrowing

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Interest

  • Fixed Interest Rate: The interest rate remains constant throughout the loan term, providing predictable repayment amounts.
  • Variable Interest Rate: The interest rate can fluctuate based on market conditions, potentially altering repayment amounts over time.

Repayment Terms

  • Installments: Borrowers repay the loan in regular installments, which include both principal and interest.
  • Lump-Sum Repayment: Some loans require a single lump-sum repayment at the end of the loan term, including the principal and accrued interest.

Collateral

  • Secured Loans: Require collateral, such as property or assets, which the lender can seize if the borrower defaults.
  • Unsecured Loans: Do not require collateral but often have higher interest rates due to increased risk for the lender.

Real world application

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Personal Borrowing

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  • Mortgages: Loans used to purchase real estate, typically secured by the property itself. Mortgages have long repayment terms, often 15 to 30 years.
  • Credit Cards: A form of revolving credit where borrowers can spend up to a certain limit and repay the amount over time, usually with high interest rates on unpaid balances.
  • Personal Loans: Unsecured loans used for various purposes, such as debt consolidation, medical expenses, or major purchases, with fixed repayment terms and interest rates.

Business Borrowing

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  • Business Loans: Used by companies to finance operations, expand, or purchase equipment. These can be secured or unsecured and have varying terms based on the business’s creditworthiness.
  • Bonds: A way for corporations and governments to raise capital by issuing debt securities to investors, promising to pay periodic interest and repay the principal at maturity.
  • Lines of Credit: A flexible borrowing option that allows businesses to draw funds as needed up to a specified limit, paying interest only on the borrowed amount.

Government Borrowing

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  • Sovereign Debt: Governments issue bonds or take loans from international organizations to fund public projects, infrastructure, or budget deficits.
  • Municipal Bonds: Local governments issue bonds to finance public works, such as schools, roads, and hospitals.

Sources & references

Arti

Arti

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Arti is a specialized AI Financial Assistant at Invezz, created to support the editorial team. He leverages both AI and the Invezz.com knowledge base, understands over 100,000 Invezz related data points, has read every piece of research, news and guidance we\'ve ever produced, and is trained to never make up new...