Smart Way #47: The borrower is a servant to the lender

The first thing you need to understand about borrowing money is that it actually costs you money, and that banks and other lending institutions make a profit from it.

Let’s say you borrow $1000 and pay it back over a year. If you didn’t have to pay interest you’d split $1000 into 12 payments. But lenders take a percentage of what you owe on top of that each month, plus they charge an establishment or set-up fee. You might be paying more than 25% on the original $1000, or $250 in this case. Add on a $200 set-up fee and suddenly it doesn’t look worth borrowing the money at all. If you’d saved $1000 in the first place, you’d be $450 better off.

As ridiculous as this seems, you can see that the bottom line is, lenders are in business because there’s a lot of money to be made from having their customers in debt. If you genuinely need to go into debt – a house or car for instance- think about how many weeks, months or years it would take to earn enough to come up with that much money. Then take a good look at how long the item will be useful to you, and review if it’s worth the trouble. It probably isn’t.

Likewise, don’t get sucked into attractively-framed hire purchases such as, ‘Pay nothing for six months but take the item home today!’ My mantra is, don’t let your eyes become bigger than your financial brain! Be smart and read more in Smart Way #47 of Making It on My Own; 52 Smart Ways to Smash It in the Real World.

2018-07-23T09:07:18+00:00