When ever Is it best to Borrow Money
Quick: what’s the simplest move to make today (financially speaking)?
In the event that you answered’borrowing money ‘, then head to leading of the class because you are obviously a sharp student and a citizen of the world.
Unlike those times when borrowing money was tough, today, everyone wants to lend you money. Banks, finance companies, bank cards, cooperatives, pawn shops – all of them want to lend you money. So they really outline pamphlets, flyers, letters, e-mails and even pre-approved loans with attached cheques to you. All you have to to complete is say’yes ‘, sign the form and the cash will soon be in your banking account in the blink of an eye.
So much so that I believe the only qualification any particular one must borrow money today is to own a heart beat! Even individuals with bad credit report or come in the’black-list’can still borrow money 借貸. Just log to web sites of some cooperatives, and you might find that they proudly display that’people in the blacklist can apply.’ In short, if you should be alive, then you can borrow!
So again, there are no shortages as it pertains to people offering you money.
But in case you occupy the offer because it’s right in front of you? Should you buy it because it is there? All things considered, it is fast, easy and convenient. And primarily, it is m-o-n-e-y.
Now while there are certainly a lot of fun things you are able to do with the cash, being someone who would like to develop a better financial life (why else can you be scanning this magazine?), the solution may be no. Firstly, you are not planning to borrow the cash just so that you can blow it on some gadgets, trinkets or toys. (Those who plan to do so ought to be reading Stuff magazine instead!)
You are likely to borrow only when you are able generate additional money with it. Put simply, you borrow only when the return from the investment you are likely to make is higher than the interest charged for the loan. For instance, the return is 10 percent and the interest is 6 percent.
Obviously, you’d not do this when the problem is another way around, i.e. when the return from the investment is lower than the interest charged for the loan. In the event that you say that you cannot find an investment that offers an increased return than the interest charged, then the solution is not to borrow! Wait until you’ll find one that offers an increased return. I could assure you that there are plenty of good investments if you appear hard enough.
But of course, life is not that straight-forward. While the math says that you ought to borrow when the return on investment is 7.5 percent and the interest is 6.25 percent, what is missing from the equation is the chance involved. Now if both the return and interest are fixed, then it is no problem, proceed and borrow. However, often times, both are not fixed, which means they could go up or down. And this being life, it is the return that always drops and the interest that always rises!
This is the reason you need to only borrow when the return exceeds the interest by at the very least 5 percent. For instance, if the interest is 6 percent, the return must certanly be 11 percent or higher. This way, you are building in a safety margin to cater the fluctuations of the rates.
You will no doubt realize it is not too easy for the aforementioned situation to happen. It’s rare for the return from an investment to exceed the loan interest by 5 percent. Actually, it is rare for some investments to provide a regular double figure return.
This is the reason you need to borrow money only on two occasions; (1) to buy properties, and (2) to expand your business. Obviously, provided that you have done your homework and know that which you are doing. Buying the initial property you see is a certain recipe for disaster.
This brings us to the main point of all of them; when you borrow money, don’t forget that you have to cover it back, plus interest! And i’d like to further remind you that individuals who lent you money do not have an expression of humour – they always want their cash back! And a number of them will take some extreme steps to obtain their money back.
So to summarize, do your research before borrowing money. If you cannot earn more income with the borrowed money (while having a reasonable risk), then don’t borrow. Let individuals who didn’t read this article take most of the risks instead!