Borrowing can help when you really need it, but it always has a price. Understanding the rules keeps you in control of your money.
This article is the reading companion to the free Mondosol lesson Money Matters: Borrowing & Debt, part of the Money course. Read it, watch the videos, or press play and listen first, then practise in the lesson.
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In this article
What borrowing means
To borrow is to take something, usually money, that you must give back later. To lend is to give it to someone who will return it. The money you owe until you pay it back is called debt.
Borrowing from a friend can be informal. Borrowing from a bank is usually a loan: an agreement with set rules about how much, for how long and at what cost.
The key words
| Word | What it means |
|---|---|
| Borrow | To take money you must give back later |
| Lend | To give money to someone who will return it |
| Debt | Money you owe because you borrowed it |
| Loan | An agreement where a bank or person lends you money with set rules |
| Interest rate | The percentage extra you pay on top of what you borrowed |
| Repay | To give the money back, often in regular payments |
| Credit | The ability to buy now and pay later, a form of borrowing |
Why interest matters
Interest is the price of borrowing. The higher the interest rate and the longer you take to repay, the more you pay in total.
Invented numbers, only to show the idea. Say you borrow 100 euros at 10 percent interest for one year with a single repayment.
| Item | Amount (EUR) |
|---|---|
| Borrowed | 100 |
| Interest (10%) | 10 |
| Total to repay | 110 |
Real loans have different rules, so always read the terms and ask what the total cost will be.
Borrowing wisely
- Ask first: is this a need or a want? Borrowing for a want is riskier.
- Know the total cost, not just the monthly payment.
- Make a repayment plan before you borrow, and check it fits your budget.
- Borrow less than the maximum you are offered.
- Read the fine print. Our guide to contracts and fine print shows what to check.
Missing payments can add extra charges and make future borrowing harder. If you are struggling, contact the lender early and ask for help.
Watch: borrowing and loans
Two videos explain how loans, credit and interest work. They are explanations, not advice.
Video: “Why borrow money? How credit, loans and interest work” by GoHenry, on YouTube.
Video: “The Basics of Loans Explained – Simple Beginner’s Guide” by Money Instructor, on YouTube.
Take it further
Reading is a good start. These options help you go from knowing to doing.
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Frequently asked questions
What is the difference between borrowing and lending?
Borrowing means taking money you must give back. Lending means giving money to someone who will return it.
What is an interest rate?
It is the percentage extra you pay on top of what you borrowed. A higher rate means a higher total cost.
Is all debt bad?
Not always, but it always costs something. The key is to know the total cost and be sure you can repay it.
What is credit?
Credit is the ability to buy now and pay later. It is a form of borrowing, so it must be repaid, often with interest.
What should I do if I cannot repay on time?
Contact the lender as early as possible and ask about options. Do not ignore the problem.
Keep learning
- Course: Money
- Lesson (practise it): Money Matters: Borrowing & Debt
- Read next: Needs vs. Wants and Risk and Reward
- Related: How to Start an Emergency Fund in 30 Days
Educational, not financial advice. The example numbers are invented, and this post contains no affiliate links. Mondosol is not a licensed financial adviser.
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