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When In the event you Borrow Money
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Publish-date-icon August 15, 2012
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EPISODE DESCRIPTION

Quick: what is the easiest move to make today (financially speaking)?

If you answered 'borrowing money', then go to the front from the class because you must be a clear, crisp student and a citizen around the globe.

Unlike those times when borrowing money was tough, today, everyone wants to lend serious cash. Banks, finance companies, credit cards, cooperatives, pawn shops - they all wish to lend you money. So that they submit pamphlets, flyers, letters, e-mails and even pre-approved loans with attached cheques for you. All that you should do is say 'yes', sign the form and also the money will be in your money within the blink of an eye.

So much in fact that I think the only qualification that one needs to take a loan today is to possess a heart beat! Even people with poor credit report or have been in the 'black-list' can still take a loan. Just log on to those sites of some cooperatives, and you will observe that they proudly display that 'people within the blacklist can use.' In short, if you're alive, you'll be able to borrow!

So again, there aren't any shortages with regards to people offering you money.

But should you take up the offer because it's at the front of you? Should you snap it up because it is there? After all, it is fast, easy and convenient. And most of all, it's m-o-n-e-y.

Now while there are a lot of fun steps you can take using the money, being someone who wants to produce a better financial life (why else would you be reading this magazine?), the solution might be no. Firstly, you are not going to borrow the cash so that you can mess it up on some gadgets, trinkets or toys. (People who plan to do so ought to be reading Stuff magazine instead!)

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You are going to borrow only if you can generate more money with it. Quite simply, you borrow only when the return in the investment you are going to make is greater than the eye charged for that loan. For instance, the return is 10 percent and also the interest rates are 6 %.

Obviously, you wouldn't do so when the situation may be the other way around, i.e. once the return from the investment is gloomier compared to interest charged for the loan. Should you state that you cannot find an investment that gives a greater return than the interest charged, then the response is to not borrow! Wait until you can find one which gives a higher return. You can be assured that there are lots of good investments if you look with enough contentration.

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But of course, every day life is not too straight-forward. While the math states that you need to borrow once the roi is 7.5 percent and the interest rates are 6.25 %, what is missing in the equation is the risk involved. If both the return and interest are fixed, then its no problem, go on and borrow. However, often times, both are not fixed, meaning they are able to go up or down. Which being life, it is the return that always drops and the interest that always rises!

For this reason you need to only borrow when the return exceeds the interest by at least Five percent. For example, when the interest is 6 %, the return should be 11 percent or higher. This way, you are building inside a safety margin to cater the fluctuations from the rates.

You'll without doubt understand that it's not so easy for that above situation to happen. It's rare for the return from a good investment to exceed the borrowed funds interest by Five percent. Actually, it is rare for many investments to give a regular double figure return.

For this reason you need to borrow money only on two occasions; (1) to purchase properties, and (2) to grow your company. Of course, so long as you have carried out your research and know what you do. Buying the first property the thing is is really a sure recipe for disaster.

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This raises the most important reason for all of them; whenever you borrow money, remember that you have to pay it back, plus interest! And allow me to further remind you that the people who lent you money don't have a feeling of humour - they always want their cash back! And some of them will require some extreme steps to have their money-back.

So to summarize, research your options before borrowing money. If you fail to make more money using the borrowed money (while going for a reasonable risk), then do not borrow. Allow the people who did not read this article take all the risks instead!

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