How many times have you loaned money to a friend without getting it back? It might be a small amount, but those constant requests for money can really add up over time. And what about borrowing money from a friend? It never feels good until the person you borrowed from is paid back in full. Now imagine this debt on a bigger scale. The interest on these loans is how banks make money.
How Interest Can Kill Individuals
Purchasing a house costs a considerable amount of capital. To buy one, individuals and families need to take out a loan and follow up by paying a mortgage every single month.
These mortgage payments can add a significant amount to the face value of the loan, depending upon the length and size of it. But Americans don't seem to care about this burden and purchase houses without first considering the Interest Rate implications. And without a proper salary to support the payment of this interest, individuals will soon find themselves with no house.
Even simple loans that consumers take out to pay for basic things like food can be predatory. Daily interest rate loans compound quickly over time and result in massive paydays for the lender, if the borrower is even able to pay them back. But the implications of interest rates don't just apply to individuals.
Debt is Not Your Friend in Business.
If you've ever watched "Shark Tank" before, you know that Mark Cuban is not a fan of debt. He recommends that founders in startups either find investors or use their own capital to slowly build up their business. Taking out a loan before proving that your idea is a good one results in debt without a great way to pay it back.
And the interest rate implications on business loans can be even worse than the ones for individuals. Often risky businesses, like restaurants, are forced to take on higher interest rate loans that price the inherent riskiness of the business in. If a business owner can, he/she should avoid taking on debt at all costs.
Alternatives.
Ideally, people should use their own capital to finance their daily and business activities. When starting a business, this is sometimes not possible. In this case, businesses should turn to investors who are willing to partner with the company and take an equity stake in it. This way, the investor is ready to contribute to the success of a business that they are truly a part of. Even without investors, businesses can sometimes turn to family members who are willing to loan a bit of money to what they think could be a good idea. Before you turn to debt, always think of the alternatives first.
