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When In the event you Take a loan
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Publish-date-icon August 14, 2012
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Quick: what's the easiest thing to do today (financially speaking)?

Should you answered 'borrowing money', then go to the front of the class since you must be a clear, crisp student along with a citizen of the world.

Unlike those days when borrowing money was tough, today, everyone wants to lend serious cash. Banks, financial institutions, charge cards, cooperatives, pawn shops - they all wish to lend serious cash. So that they send in pamphlets, flyers, letters, e-mails as well as 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 bank account within the blink of an eye.

So much in fact that I think the only real qualification that one must take a loan today would be to possess a heartbeat! Even people with poor credit report or are in the 'black-list' can still borrow money. Just log on to those sites of some cooperatives, and you'll see that they proudly display that 'people in the blacklist can apply.' In a nutshell, if you're alive, then you can borrow!

So again, there are no shortages with regards to people offering you money.

But should you take up the offer since it is right in front of you? Should you grab it since it is there? In the end, it's fast, easy and convenient. And many of, it's m-o-n-e-y.

Now while there are a lot of fun things you can do using the money, being someone who really wants to produce a better financial life (why else would you be looking over this magazine?), the solution may be no. Firstly, you aren't likely to borrow the money just so that you could blow it on some gadgets, trinkets or toys. (People who expect to do so should be reading Stuff magazine instead!)


You are going to borrow only when you can generate more money by using it. In other words, you borrow only if the return from the investment you will make is higher than the eye charged for the loan. For example, the return is 10 percent and the interest is 6 %.

Obviously, you wouldn't do so when the situation is the other way around, i.e. once the return in the investment is gloomier than the interest charged for the loan. If you say that you can't locate an investment that provides a higher return than the interest charged, then the answer is not to borrow! Hold back until you'll find one that gives a higher return. You can be assured there are plenty of good investments if you look hard enough.


However, every day life is not too straight-forward. While the math states that you should borrow when the return on investment is 7.5 percent and the interest is 6.25 percent, what's missing in the equation is the risk involved. If both return and interest are fixed, then it is no problem, go ahead and borrow. However, quite often, both are not fixed, which means they can go up or down. Which being life, it is the return that always drops and also the interest that always rises!

For this reason you need to only borrow once the return exceeds the eye by at least 5 percent. For instance, when the interest rates are 6 percent, the return should be 11 percent or more. By doing this, you are building inside a safety margin to cater the fluctuations from the rates.

You will without doubt realize that it is not so easy for the above situation to happen. It is rare for the return from an investment to exceed the borrowed funds interest by 5 percent. In fact, it is rare for most investments to give a consistent double figure return.

For this reason you should take a loan only on two occasions; (1) to purchase properties, and (2) to grow your business. Obviously, so long as you have done your research and understand what you are doing. Buying the first property you see is really a sure recipe for disaster.


This brings us to the most important point of them all; when you take a loan, don't forget that you have to pay it back, plus interest! And let me further remind you the individuals who lent you money do not have a feeling of humour - they always want their money back! Plus some of them will take some extreme steps to have their money-back.

To summarize, do your homework before borrowing money. If you cannot make more money using the borrowed money (while taking a reasonable risk), then do not borrow. Allow the people who did not look at this article take all of the risks instead!

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