Influences on Household Borrowing
What is borrowing ?
Borrowing occurs when an individual, business, or government takes a loan from a bank or financial institution and repays it over time with interest.
Borrowing creates debt.
Debt is manageable if repayments are affordable and interest rates are low.
Higher interest rates increase repayment costs and reduce purchasing power.
Reasons for Borrowing
Individuals and businesses may borrow to:
Buy expensive items (cars, holidays)
Pay for education
Purchase property or land
Start a new business
Expand a business or fund large projects
Factors Affecting Borrowing
Interest Rates
Interest is the cost of borrowing.
Higher interest rates make borrowing more expensive.
Lower interest rates encourage borrowing.
Relationship:
Interest rates ↑ → Borrowing ↓
Interest rates ↓ → Borrowing ↑
Confidence Levels
People and businesses borrow more when they feel optimistic about the economy.
Firms may borrow to invest and expand if future profits look promising.
Low confidence reduces borrowing.
Availability of Funds
Banks lend money through loans and mortgages.
The central bank controls how much money banks can lend.
Cash Reserve Ratio
The percentage of a bank's funds that must be kept in reserve.
Lower cash reserve ratio → More money available for lending.
Higher cash reserve ratio → Less money available for lending.
Credit Cards
Allow people to buy now and pay later.
No interest is charged if the full balance is paid on time.
Interest is charged on unpaid balances.
Credit card interest rates are usually very high.
Effect: Easy access to credit can increase borrowing.
Store Cards
Issued by retail stores to encourage spending.
Can only be used in that particular store.
Often provide discounts, gifts, or loyalty points.
Interest is charged if debts are not repaid on time.
Effect: May encourage overspending and increase debt.
Wealth
Wealthier individuals and profitable businesses find it easier to borrow.
Banks see them as lower-risk borrowers.
Poorer borrowers are considered more likely to default.