From the course: Setting Your Financial Goals

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Understanding borrowing risks

Understanding borrowing risks

From the course: Setting Your Financial Goals

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Understanding borrowing risks

- Nearly everyone borrows money at least for a home or car. Managing debt properly is a skill most of us need to develop to develop that skill you need to understand the risk of taking on debt. Think of this discussion as the borrowing risks that keep you up at night. One risk is Interest-rate risk if interest rates are increasing borrowers will be charged more interest for new fixed-rate loans. By fixed-rate, I mean a loan in which interest stays the same until the principal amount is repaid. If for example you have a 5 year 8%, fixed-rate car loan, your interest rate will be 8% annually on any principal amount you owe. If at the end of 5 years, similar 5 year car loans are at 9.5% you'll pay more interest for a new car loan. This risk of paying more interest on a loan is Interest-rate risk. Interest-rate increases are connected to another risk the risk of Inflation. Inflation can be defined as the overall increase in retail prices over time. For consumers, inflation means that a…

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