Whenever Should You Borrow Money
Fast: 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 college student and a citizen of the world.
Unlike those days when borrowing money was tough, today, everyone wants to loan you money. Banks, finance companies, credit cards, cooperatives, pawn shops – they all want to lend you money. So they send in pamphlets, flyers, letters, e-mails and even pre-approved loans with attached cheques to you. All you need to do can be say ‘yes’, sign the form as well as the money will be in your bank account in the blink of an eye.
So much so that I think the only certification that one needs to borrow money nowadays is to have a heart beat! Even people with bad credit report or are in the particular ‘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 can apply. ‘ In short, if you are living, then you can borrow!
So again, you will find no shortages when it comes to people providing you money.
But should you take up the particular offer because it’s right in front of you? Should you grab it because it is presently there? After all, it is fast, easy and hassle-free. 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 develop a better financial life (why otherwise would you be reading this magazine? ), the answer may be no . Firstly, you are not going to borrow the money just so that you can blow it on some gadgets, figurine or toys. (Those who plan to do so should be reading Stuff newspaper instead! )
You are going to borrow only when you can generate more money with it. In other words, a person borrow only when the return in the investment you are going to make is greater than the interest charged for the loan. For instance , the return is 10 percent and the interest is 6 percent.
Obviously, you would not do so when the situation is the other way around, i actually. e. when the return from the expense is lower than the interest charged for that loan. If you say that you cannot find an investment that gives a higher return compared to interest charged, then the answer is just not to borrow! Wait until you can find one that gives a higher return. I can assure you that there are plenty of great investments if you look hard enough.
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But of course , life is not that straight-forward. While the math says that you should borrow when the return on investment is 7. 5% and the interest is 6. 25 %, what is missing from the equation will be the risk involved. Now if both return and interest are fixed, then it is not an issue, go ahead and lend. However , often times, both are not set, which means they can go up or down. And this being life, it is the return that always drops and the interest that always rises!
This is why you should only borrow when the return exceeds the interest simply by at least 5 percent. For example , if the attention is 6 percent, the come back must be 11 percent or higher. This way, you are building in a safety perimeter to cater the fluctuations from the rates.
You will no doubt realize that it is far from so easy for the above situation to happen. It is rare for the return through an investment to exceed the loan interest by 5 percent. In fact , it really is rare for most investments to give a regular double figure return.
This is why you should borrow money only on two occasions; (1) to buy properties, plus (2) to expand your business. Naturally , provided that you have done your research and know what you are doing. Buying the 1st property you see is a sure recipe for disaster.
This brings us to the most important point of them all; if you borrow money, don’t forget that you have to repay it, plus interest! And let me more remind you that the people who lent you money do not have a sense of humour – they always want their own money back! And some of them will take several extreme steps to get their money back.
To summarize, do your homework before borrowing money. If you cannot make more money with the borrowed cash (while taking a reasonable risk), then do not borrow. Let the people who failed to read this article take all the dangers instead!