Chapter P6, Problem 1RQ

To determine

The advantages and disadvantages of borrowing money

Explanation of Solution

The advantages of borrowing money are as follows:

1. The major advantage of borrowing money is the tax benefit. A person can borrow money to take tax advantage because interest on loans and bonds is tax deductible.
2. By borrowing, a person can make large purchases such as a home loan to facilitate a person to buy a house.
3. People can invest borrowed money in properties or other business practices to generate more revenues or even they can start their own businesses.
4. Borrowing also improves credit score for a further loan.

The disadvantages of borrowing money are as follows:

1. People have to pay interest on borrowing which increases the cost when the interest rate is higher.
2. There is a risk of failure to repay the loan which can force people to sell their assets if they get fail to repay especially when borrowing is guaranteed and secured.
3. It can also ruin credit scores if someone fails to pay the loan amount.

Economics Concept Introduction

Introduction: People use the money for different purposes. And, they borrow money to fulfill their needs or to invest further to get higher profits in the future.