Borrowing money creates the risk that you won't be able to repay it, but it also opens the doors of financial opportunity. Just as businesses and governments take advantage of finance opportunities to invest in growth and meet their short-term needs, households also use finance to make good financial decisions that meet the needs of everyone in a family.
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Household financing is the term for borrowing money to meet household needs, including the home itself, repairs and maintenance.
Household Financing Overview
Household finance refers to any sort of borrowing that takes place involving a family of individual. Numerous sources of household finances are available, and families find many different economic needs to meet with borrowed money.
Household finance is distinct from business finance, which involves a business taking out a loan to make company-related purchases. In the case of a small or family-owned business, business borrowing is not part of household finance even if there is a strong economic relationship between the business enterprise and the fortunes of the family.
Household Financing Uses
Families and individuals use household financing to fund a number of types of spending. One of the most common is purchasing a house itself, which requires a mortgage loan with a repayment schedule that becomes part of the monthly budget for decades to come.
Household financing may also include auto loans for buying new or used cars, as well as recreational vehicles. Households also borrow to fund education for children and adults, to pay medical bills and to complete home improvement projects or necessary repairs.
Household Financing Sources
Just as household financing can go to many uses, it can also have many sources. Credit cards are one source that can pay for almost anything, including daily purchases and utility bills. A second mortgage, which is a loan or line of credit that homeowners take out against the equity in their homes, can pay for major expenses.
Banks provide the mortgage loans, auto loans and some forms of college loans that become part of household financing. The federal government is another source of household financing through its direct education loan program.
Household Financing Terms
Every household needs to make its own financing decisions carefully to fit them into a limited budget. Each type of household financing has its own repayment terms and interest rate, which means some cost more to borrow than others.
In addition, loans with adjustable interest rates, which include some mortgages, second mortgages and credit cards, can cause monthly payments to rise in the future even if the balance on the loans falls or remains the same. Saving and investing money for future spending is more cost effective than seeking financing as special needs arise.