Borrowing Responsibly

Dele needed a loan from the bank to fund his water-manufacturing business. He had done his calculations and from his analysis and projections, the business was going to be viable and very profitable. All he needed was capital from the bank to add to his personal savings and he was good to go!

As he walked into the bank that afternoon, Dele knew he was overqualified for the loan. He had the collateral and an excellent credit rating to easily get a loan approved. After a brief meeting with a financial advisor, he was told that the only additional requirement for the loan was to open an account with the bank, transfer his funds and sign the documents that would approve regular deductions for repayment, after the 6-month loan term is over.

Seven days after, Dele receives an alert that the bank had released some funds to him and he was ready to finance his dream-startup. But then, he remembers that new car he always wanted to buy. Oh, and furniture for his new home and also payment for the much needed vacation with his family. The over excitement from getting the loan completely threw him off track from financing the business and a few months down the line, he is not quite satisfied with how he has squandered all the money. On top of that, the bank is due to start collecting their monthly payments plus the high interest rate.

This is typically the case of many people who start off with an aim when borrowing from the bank and in some cases, deviate from the original purpose of the loan. If you’re not cautious, borrowing money from the bank may lead you into a serious debt crisis. Good management, discipline and proper planning are the difference between a spiral of debt and manageable liabilities. You must be able to work out what’s reasonable and structure a plan to gradually pay it off. Here are some thoughts on borrowing responsibly:

1. There’s often a big difference between the amount you have access to when borrowing and the amount you can afford to pay back when it is time for repayment. Banks are happy to lend you money if they are certain you are capable of paying it back. However, you must make sacrifices in your lifestyle that will enable you to diligently pay back without incurring huge debt on interest. Consider what you can forfeit. Perhaps that new car or house can wait for now. Work out your repayment strategy before borrowing and see if it is sustainable. This may require you to wait a little longer before engaging in the project you need to finance.

2. Before borrowing, you must consider how secure your present job or business is, and project your long-term finances. Are you dependent on bonuses or sales commission? When are you planning to retire? Is it wise for you to take that loan based on your long term goals and projections? These are factors that must be considered before taking any loan.

3. Where you are in life can also determine whether or not it is a wise decision to borrow. Are you about to start a family? Or perhaps you just started a new job. You must carefully and honestly evaluate your present condition before committing to take on a loan. Defaulting on a loan will negatively affect your credit rating with the bank and this will result to other financial implications. You must also read and understand the terms and condition of the loan and be certain they are favorable before you commit.

4. Finally, identify your breaking point. You might be able to afford repayments with interest rates locked in at today’s rate but they could rise due to delays in repayment. Account for all your present debts before making a decision to take a loan. If you are already swimming in debt, perhaps it may not be a wise decision to borrow from the bank after all.