Many times because they just don't have the money to purchase a "needed" item at the time (house/car). Those rates are generally very low. If you want to buy something with an interest rate higher than 10%, you're probably making a mistake.
10 months ago
Last edited at 8:52AM on 2/28/2013
Many people go into debt, because they don't have the cash to pay for it now. Such as, buying a used car for $14,000, and paying it off in 6 years. The 6 years payoff might be $3,000 interest, giving a payback of $17,000. The average working person doesn't have $14,000 cash! If they need a car now to go to work, they can't wait for 6 years, putting money into a savings account so they can pay cash later.....they need the car now. Credit Card debt is a completely different story. I only use my Credit card, if I can pay it off the next month! I don't like 33% interest! Many don't know how fast Credit Card debt can add up, until it's too late.
Sometime a person needs things now so they charge knowing they will have the money later. People get caught up in the debt cycle. Sometimes it can become an addiction like any addiction like smoking, drugs, even food. It temporary satisfies an emotional need. There is DA (Debtors Anonymous) that helps people who are addicted to spending beyond their means.
There is a difference between borrowing for something you "need" and something you "want". When it comes to a large ticket item like a place to live, sometimes it the ONLY way. A mortgage on a home, for instance. Not to many people can save up to buy a house without credit. For those who need to buy a car .. A good dependable car. Same thing.
However, borrowing to buy luxuries ... Is a completely different story. I am of the opinion, if you can't save and pay for it ... You can't afford it .. Adding interest to an item that you already can't afford is not very wise financial planning.
Interest is an opportunity cost. They need to be confident they can pay it back. Maybe they just want to enjoy life. Another thing to remember is that people dont have money problems, they have money management problems. (except the very poor who have none to manage)