The most basic definition of a borrower is a person or institution that borrows money from another person or institution. In terms of consumer credit, however, a borrower is an individual or company that borrows from a financial institution or other approved lender according to legislation set down in the particular jurisdiction in which the transaction is carried out.
Responsibilities of Borrowers
Those that borrow money have certain responsibilities towards the lender or lenders they have borrowed money from: by signing the legal contract attached to the debt, they are agreeing to make any scheduled repayments on time, and in full. If they fail to do this, then the lender has a number of options, all of which should have been set out in the signed contract: additional charges may be levied for each and every missed payment; the borrower’s credit rating may be adversely affected, especially if there are multiple missed payments; with certain types of debt the lender may require all or part of the outstanding amount to be repaid immediately; and legal action may be taken to recover the debt, including passing the borrower over to a debt collection service.
In extreme cases, the debtor may even be forced into bankruptcy, though there are a number of steps that can be taken before this stage is reached. The borrower can take the advice of a debt management company, though the charities that offer free debt advice tend to be more impartial. If the borrower is in serious debt, an Individual Voluntary Arrangement or a Debt Relief Order may be appropriate; these can be arranged by a licensed insolvency practitioner.
What to Look Out for When Borrowing Money
Aside from their responsibilities, borrowers should also consider a number of other things when deciding on whether to take on debt.
How much will the debt cost to take on? Aside from the interest rate, any charges (both mandatory and optional) should be considered as they can make a substantial difference to the cost of the debt. Indeed, for some types of debt fees can push the cost of the debt far too high to be affordable. Payday loans are a prime example: associated loan charges can mean an effective APR (annual percentage rate) of thousands of percent!
Borrowers should also consider whether they are likely to have the income to support debt repayments. With loans and mortgages, can they afford the repayments for the full length of the debt, which with mortgages could be 25 years? With credit cards, can the borrower pay off any debt in full before interest is charged? If not, can they afford to pay the regular repayments that will be necessary? If they do not, or only make a minimum payment every month, it is possible that they have taken on what may be in effect a permanent debt, as paying a minimum amount every month can mean even a small debt could take years to fully repay due to the interest that constantly accumulates.
In addition, the borrower should check if there may be any changes to interest rates during the course of the debt. This is especially common with mortgages and credit cards, which can have low interest rates for an introductory period, which get much higher after the introductory period has ended. In this way, what can start as an affordable debt can suddenly become unaffordable.