FINANCE THOUGHTS: SHOULD YOU EVER BORROW MONEY?

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Originally Posted On: Midwife and Life – Finance Thoughts: Should You Ever Borrow Money? – Midwife and Life

Borrowing money is certainly not common, but you would be lying if you didn’t at least wince at the thought. It’s not common to ‘us’, we tend to believe that we don’t require the extra help in this way. And yet, circumstances may arise whereby you don’t really have a choice, you just need the additional financial cash flow to help you out of a poor situation. However, some of us tend to borrow too quickly. Until you have exhausted all your options, you shouldn’t borrow money, ever. So what are the other options that you have to use up, before going onto the next troublesome step? We shall explore these and hopefully, you can question yourself whether you have tried them genuinely or not.

The 10% minimum challenge

First and foremost, the tried and tested saving challenge of 10% of your monthly earnings, should at least be your benchmark. Can you save 10% of your monthly earnings? Chances are that you can. If you earn an average salary of $40,000, and you earn $3,333 a month, surely you can find some way to save $333 a month too. By the end of the year, you will have saved around $4,000. Not to mention, 10% is just the benchmark. This bar isn’t very high at all. Many of us save this much, just for our annual holidays. So chances are, you could double this, and save 20% or higher a month.

With this amount of savings a month, you can find yourself racking up the amount and before you will know it, thousands of dollars are at your disposal. The issue is, many people who borrow money, borrow because of the predicament they are in. but, nothing like this ever pounces on you, at least not commonly. Unless your home burned down, your car was totaled or something similar of magnitude occurred, you should not take to borrowing so easily when you have the 10% benchmark rule.

Not savvy to the rates

People often think of the borrowing market as the victims market. So many people who are absolutely clueless about borrowing, find themselves becoming victims over time. They didn’t realize how high the interest rates were, they didn’t know what the consequences would be for late payments, how fast the payments may increase, who has the power to increase them, how soon they need to pay back in full, etc. It may seem straightforward and yet, if you look at the Safety Net Credit issue, you’ll see that it’s easy to get sucked in. So many customers who took a SNC line of credit, find out that the more they borrow the higher the interest rates become.

This is the total opposite of what normally occurs. Usually, the creditors see that if you want a long-term borrowing plan, the lower the rates should be because you’re more likely to pay back in full and hence, pay back a lot more than you borrowed. Yet the SNC issue has shown, some companies like IML will do the opposite to unsuspecting borrowers.

Wait for the economy

Sometimes, the entire credit market is affected by the economy. No matter where you go to borrow money, the interest rates are just too high. This is when you should be patient, wait for the economy to heal and then see what your options are. The issue is, if interest rates remain where they are, creditors might only take on the clients who have good credit and not give the time of day to those with medium or poor credit.

During recent months, many businesses and individuals have borrowed money to stay afloat. Yet, so many of them have defaulted on the debt they owe. This has made creditors recoil, set the borrowing limits lower and the rates higher. This kind of shock does not correct itself in a few short weeks. The credit market is a little harsh at the moment due to the fact that so many businesses and people have been unable to meet their obligations. The virus and slowdown of the economy have really affected the perception of creditors, so it’s perhaps best to wait a few months or a year until you consider borrowing.

What is necessary?

First of all, you should never borrow for short-term aims. In the moment, something that is short-term might seem and feel like it’s going to affect you long-term. For example, if you were involved in an accident and your car has been wrecked and your insurance won’t cover it. What should you do, buy a new car or find some other way to get to work and run errands? It may seem hard at first, but the latter is the best option, until you can buy a new or used car.

This is an ethos that protects you financially and gives you a new perspective of what your necessities are. You’ll find that the list of necessities is actually quite short. Here are some valid necessities you should consider borrowing money for.

• Home: if your home has been damaged in some grievous manner, such as by a flood, fire or earthquake and you need money for repairs. Your house is a store of value, so it should end up paying for itself in the long run.

• Your health: you’re not going to be much good to anyone, least of all yourself, if you are injured or sick in bed. So if you need to pay for operations and or medicine, but don’t have the funds yourself, consider your insurance options or borrow money.

• Assets: if you have a letting property, a vehicle such as a boat, or perhaps a business, your assets are worth protecting. Likewise to your home, a letting property, business or special assets like a yacht, boat, or even jewelry, will end up paying for themselves in relation to how much you borrow.

Other than that, you should consider other options before borrowing.

Swallow your ego

If you absolutely have to borrow money, who says you need to crawl on your hands and knees to a bank? Why not just try and see if your friends or family will help?

Alarm bells might be ringing for some people who read that, as they believe you should never ever mix friends and family with money. It’s just like oil and water, they will never ever coexist peacefully. Granted, in some cases that is true, but it’s not a universal rule. If you have affluent parents, they might be willing to lend you a few thousand, or your friends might be willing to help you out with a few hundred dollars.

The best part of borrowing within your close circle is, you get to both agree on the interest rate. You may find that some of you have great family and friends who won’t want an interest rate from you at all. So you only pay back exactly what you owed and no more. That in itself is a load of pressure taken off your shoulders.

Should you ever borrow money? Yes, your necessities should be protected. These are your home, your health and your assets such as property or businesses. However, for most situations, you should rely on your savings to help cushion a financial blow. In many cases, you need to do thorough research about the economy, the interest rates and the borrowing conditions of the creditor, before taking out any money. Once you’re locked in, you have tied a rope around your waist to the creditor.