Hecton Hemans, Contributor
SURPRISINGLY, many persons still hold fast to the old adage, "neither a borrower nor lender be". Whilst this approach to their finances may prove useful in a few circumstances, this overly conservative position may be found to have a limiting effect on their potential for wealth creation and personal success. If you are like those persons, perhaps we can share a few pointers that may be worth considering. If you believe that borrowing sensibly can contribute significantly to your efforts at prosperity and wealth creation, then we may be able to reinforce that view in the following paragraphs.
Many of us learn quite early in life the virtues of "living within our means". Financial resources are always available in limited quantities and are hardly, if ever, sufficient to satisfy the desires of our heart. We either postpone certain acquisitions or projects until we can "afford" them or avoid them altogether if they are considered to be outside the reach of our identifiable resources. Depending on the nature of the item desired, we might decide to save toward the purchase price or cost or undertake the related transaction from funds already saved, disposal of an existing asset or by entering into some other appropriate arrangement. Our circumstances, values or judgement force us to classify activities and acquisitions as "urgent" or "can wait", "must do" or "may do", "nice to have" or "needed" or a host of other categories that we develop over time to help us cope, survive or live. But living within one's means does not translate to not being a borrower.
Of course, the borrower who has to "borrow from Peter to pay Paul" is without doubt exceeding his means and should seriously consider curtailing his consumption habits or altering his lifestyle. If not, he risks being found on the wrong side of the law, losing treasured assets, friendships or associations, his reputation or worse. So the proverbial "debt trap" is not what we are discussing or promoting. Actually, we are keen on showing just how to avoid that and instead how to use borrowing positively: that is, to improve your lot or condition.
Utmost care
Borrowing is an undertaking that should be approached with utmost care. The ability to raise money when you need it is as important as knowing that you are there for a loved one or dependent whenever your support is required. The fundamental consideration in obtaining a loan is your creditworthiness, which is itself determined by many factors. Remember those loans you used to obtain from your parents or older siblings and hardly bothered, if ever, to repay? Well, it's a lot different now that you're grown (even if you tried to approach them) and will seek credit from a lending institution such as your bank, credit union or building society.
They rank your character very highly on the list of areas they consider in making the lending decision. What kind of person are you, what are your experience and track record? How much do you require and what is your capacity to repay? They also consider the purpose for which the money is required - is the activity legal, justified or fit within the scope of business of the lender? What is your net worth or the extent of capital accumulation? What collateral can be obtained to secure the loan in case the repayment arrangement breaks down? What are the prevailing economic conditions and how can they impact on your prospects to perform under the agreement? What particular covenants or rules must be established to manage the relationship?
Many individuals develop personal rules to guide their borrowing decisions. For instance, I have a friend who prefers to save towards certain things like overseas travel but will borrow to paint or refurbish her house, change her car and so on. She dislikes to be repaying a loan for something she cannot relate to while the loan remains outstanding. Still another friend will borrow for anything for which she can raise financing, providing she can identify enough surplus in her income to service the debt, preferring to use only very little from her personal savings. But while these decisions may be reasonable they are entirely personal. The important consideration is that these persons both appreciate that they can use credit to enhance their lifestyles. So how does the process work?
Preparation
Before you approach a lender it is quite useful to spend some time to prepare. You should be able to present an accurate statement of your assets and liabilities as well as an estimate of your monthly income from all sources and your accompanying expenses. These statements assist the lender to measure your financial stability and ability to honour the arrangement to which you are seeking to commit yourself. A primary fact worth appreciating is that a loan creates an obligation that must be repaid.
Repayment is not restricted to only the principal sum borrowed however but to the interest charged as well. The interest itself is influenced by factors such as the cost to the institution of raising the loan funds and the level of risk ascribed to the loan. Shopping around for the most favourable terms could prove quite beneficial as interest rates as well as the term of the loan and the attendant fees and charges may vary substantially among institutions. Bear in mind though that a longer term produces lower periodic payments but may actually result in higher overall interest costs. A trend of honouring your commitments and communicating any changes in your circumstances with your lender serves to build an atmosphere of trust between you and may also result in an improved credit rating, which could lower your financing costs for subsequent loans. Lenders are keen on having their loans repaid.
After all, they are answerable to their depositors, investors, shareholders and the regulators. However, they are also very keen to observe healthy growth signs in the financial status of their borrowers. The conditions that they attach to loan agreements or the financial and other information that they request from you are not intended to be irritants but to assist their decision making, including how best they can assist you to create wealth and achieve your other personal goals while protecting the interest of all stake holders involved. A few general guidelines may be in order:
Avoid frivolous borrowing. So far as possible concentrate instead on things that can generate income, protect value and produce savings or capital appreciation;
Ensure that you are able to comfortably establish and maintain ability to repay;
Refinance old debts which attract higher interest rates to take advantage of lower rates;
Consolidate miscellaneous debts to make repayment more manageable and channel any surplus cash generated into savings or other investments.
One pointer that is worth remembering is that selective use of credit can help you build a track record of performance and financial growth. Another is that this can help you negotiate more favourable terms with your lender. Together, they place you in a certain position to increase your wealth.
Hecton Hemans is Manager, Wealth Management Division, National Commercial Bank.
