Zimpapers Logo

Sanderson Abel
Borrowing is not a financial sin. However, borrowing for the wrong reasons can leave you in financial distress at the end. One way to recognise good debt is to apply the basic principle of future value. If the future value of the item you are buying can reasonably be thought to be higher than the current value, you’re likely taking on good debt.

If you are not careful, borrowing money can end up costing you more than just interest you are paying.

Good management and proper planning can make the difference between either ending up trapped in spiral of debt or in a manageable debt situation. So you must work out what is reasonable and set a plan to pay your debt off.

It is advisable during that process to try to keep your total debt repayments below 25 percent of your gross income if you can. Irresponsible borrowing might be motivated by overly easy access to loans, financial illiteracy, costs of fiscal adjustment (i.e. tax increases or spending cuts) and moral hazard. It is important that as a potential borrower you acquaint yourself with the basics of financial management relating to borrowing.

What should you consider when making the decision to borrow?

1. Borrow only what you need – A responsible borrower will only borrow an amount that he really needs.

Exercising thisz discipline will help you as a borrower to avoid being reckless with the borrowed amount.

2. Estimate the amount of debt you can afford – Before you can decide to borrow, there is need to convince yourself how much in terms of repayment you can make from your income. It is being unwise to try and borrow an amount that you will struggle to repay.

3. Understand your borrowing agreement fully – It is dangerous to put your signature on the contract form that you have not read through and fully understood. It is important to understand that your repayment is composed of the principal amount borrowed and interest due. You should ask your banker to explain to you how the repayment is calculated including all interest calculations and any other charges that relate to your borrowing.

For instance when borrowing for the purpose of buying a property, there may be Government taxes and bond registration costs that will add on to your total loan or leave you in extra debt.

4. Stay on schedule – Once you have been granted a loan, it is important that you remain on schedule with your repayments. Repaying a loan on time can create and build an excellent credit history.

5. Change of circumstances – If you can prepay an outstanding loan, just do it. Sometimes as a borrower you find yourself with extra cash, it does not harm you to make an extra payment on top of your monthly repayment. For doing this you won’t incur any penalties and you will save on the total interest due.

6. Difficulties in repaying your loan – It is usually a good idea that you meet your personal banker and ask for a deferment or for forbearance if you are experiencing problems in making your loan payments.

What are good examples of responsible borrowing?

Buying a home – A home is likely to be the single largest investment you will make, and most often it is a good decision provided you can handle the repayments comfortably. As you pay off your mortgage, you will be building equity in the property whilst enjoying your home at the same time.

Financing an education – Whether you are financing your children’s education or packing yourself off back to school, you are investing in future income. With increased education comes increased earning potential.

Financing an emergency – While this flies in the face of the theory “Never borrow in desperation,” you have to be flexible. For genuine emergencies, you may have to borrow. If you are a salesman and your car breaks down, you may have to borrow to buy a new car just to ensure you can keep making a living. But be certain you take only as much as you absolutely need. Resist the urge to make everything an emergency. And be sure you can work the payments into your cash flow.

Consolidating your debts – You can borrow to consolidate your debts at a lower rate of interest. Paying less interest is always a smart move. However, you should be committed to paying off the newly consolidated debt before taking on more. If you are not committed to throwing your cards behind the refrigerator until the loan has been paid off, don’t bother consolidating. You will just be back where you are today (or worse) in a few months.

In short, borrow responsibly. Remember that a loan is not your money; keep in mind that it is merely temporarily in your possession and that you are destined to repay your debt. If you do this, loans will work to your advantage, rather than becoming an unmanageable burden. You also earn yourself a good name, giving you greater access to new borrowing opportunities in future should you need them.

• Sanderson Abel is an economist. He writes in his capacity as senior economist for the Bankers Association of Zimbabwe. For your valuable feedback and comments related to this article, he can be contacted on [email protected] or on numbers 04-744686 and 0772463008