August 11, 2020

Whenever Should You Borrow Money

Quick: what’s the easiest thing to do today (financially speaking)?

If you answered ‘borrowing money’, then go to the front of the course because you are obviously a sharp pupil and a citizen of the world.

As opposed to those days when borrowing money was tough, today, everyone wants to bring you money. Banks, finance companies, credit cards, cooperatives, pawn shops – they all want to lend you money. So they send in pamphlets, flyers, letters, emails and even pre-approved loans with attached cheques to you. All you need to do is definitely say ‘yes’, sign the form and the money will be in your bank account speedy.

So much so that I think the only qualification that one needs to borrow money today is to have a heart beat! Even people with bad credit report or are in the ‘black-list’ can still borrow money. Just log on to the websites of some cooperatives, and you will see that they proudly screen that ‘people in the blacklist may apply. ‘ In short, if you are in existence, then you can borrow!
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So again, there are no shortages when it comes to people offering you money.

But should you take up the particular offer because it’s right ahead? Should you grab it because it is presently there? After all, it is fast, easy and convenient. And most of all, it is m-o-n-e-y.

Right now while there are a lot of fun things you can do with all the money, being someone who wants to build a better financial life (why else would you be reading this magazine? ), the answer may be no . Firstly, you are not going to borrow the money just to be able to blow it on some gadgets, trinkets or toys. (Those who intend to do so should be reading Stuff newspaper instead! )

You are going to borrow only if you can generate more money with it. In other words, you borrow only when the return in the investment you are going to make is greater than the interest charged for the loan. For example , the return is 10 percent and the interest is 6 percent.

Obviously, you would not do so when the scenario is the other way around, we. e. when the return from the expenditure is lower than the interest charged for your loan. If you say that you cannot discover an investment that gives a higher return than the interest charged, then the answer is just not to borrow! Wait until you can find one that gives a higher return. I could assure you that there are plenty of good investments if you look hard enough.

Yet of course , life is not that straight-forward. While the math says that you should borrow when the return on investment is 7. 5 percent and the interest is 6. 25 percent, what is missing from the equation may be the risk involved. Now if both the return and interest are set, then it is not an issue, go ahead and borrow. However , often times, both are not set, which means they can go up or lower. And this being life, it is the return that always drops and the interest that usually rises!

This is why you should only borrow when the return exceeds the interest by at least 5 percent. For example , if the curiosity is 6 percent, the return must be 11 percent or higher. This way, you are building in a safety margin to cater the fluctuations of the rates.

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