Financial Planning: The Fundamentals of Borrowing

One question that I ask myself when deciding to finance a purchase is what will I gain from borrowing to buy now versus saving to buy later.  If the benefits outweigh the cost to finance the purchase, i.e. all interest expense and fees incurred to secure the loan, then borrowing for the purchase is the right way to go. 

Once you’ve decided that borrowing makes sense to finance a purchase or expand your business, there are few things you should do before proceeding to secure the loan:

Determine how much you can afford to borrow.  Loans must be repaid over time along with interest so that the total repaid will be somewhat more than the amount borrowed.  Make sure you understand the schedule of loan payments as well as the full cost of the loan.  Be prepared to shop around for a loan with a rate and terms that best meet your needs.

Understand your credit score.  Your credit score will impact the total cost of your loan as lenders use this score to assess the amount of risk they will incur by lending to you.  The greater the chance of you defaulting on the loan, the more expensive the loan will be to you.  So, it is important to know your score and do all that you can to improve it prior to borrowing.  There are three primary credit reporting agencies:  Experian, TransUnion, and Equifax.  Be sure to check the report from each of these agencies in order to get the most comprehensive record of your credit history.  You can get a free credit report at www.annualcreditreport.com.

Know what lenders are looking for.  Responsible lenders are interested in your ability to repay your debt obligations.  They will want to be assured that you are responsible and will treat your loan commitment seriously.   Be prepared to provide a prospective lender with proof of stable employment and residence, with proof of income, and perhaps with a list of all your liabilities and assets.

Prioritize your needs and wants.  Determine if you are borrowing to finance something you need or something you want.  Give more consideration to those things you need and those that will yield a higher return on your investment.  Borrowing to secure something that has long-term value is a good debt strategy.

Pay attention to interest rates.  Avoid borrowing on high-interest credit cards.  Consider converting current high-interest debt obligations to lower-interest loans and credit instruments.

A final note on borrowing—a healthy amount of debt in your financial portfolio is a good way to manage your finances.  Don’t be afraid to use loans and other financing for the right purchases at the right times.  If you need help deciding if borrowing is right for you, don’t hesitate to ask a knowledgeable financial advisor.  Also, before making a major debt decision, consider contacting an agency like Consumer Credit Counseling for free or low-cost advising.  Once you understand the true cost of your debt decision, proceed with confidence that you are making the right decision to sustain and grow your business well into the future.

Posted by: Tamboura Gaskins at 3 February 2010 2:20 pm | Category: Financial Planning | Tags: borrowing, Business Management, credit, debt, financing

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