The warning in Shakespeare’s Hamlet “neither a borrower nor a lender be” was aimed at keeping money and friendship at arm’s distance.
But once you eliminate close friends from the equation, borrowing can be a powerful tool.
The real questions are how do you know when borrowing is the right thing to do; and how do you keep the cost associated with it as low as possible?
Let’s face it. We’ve heard so much about people burdened by too much debt and offers of debt consolidation loans that we sometimes lose sight of the positive side of debt. The fact of the matter is that there is a right time and a wrong time to incur debt and right and wrong reasons.
My advice – the right time to incur debt is when the cost of it is not overbearing and it will allow you to invest in a business or business idea or purchase real estate which is likely to appreciate in value and enhance your lifestyle.
Structured and used properly, debt can be a powerful tool. Almost no business in the world has grown, improved and increased its market share without borrowing.
Debt is the foundation of expansion, but the key is understanding good and bad debt practices and the full cost of borrowing.
Just like anything else – there is a right and wrong way to handle debt.
Borrowing to develop a business idea or improve your lifestyle can be a positive tool when applied to investment growth or a dangerous burden when used to consume unnecessary items.
Remember there are costs associated with debt, the primary one being interest over a long period. The total cost of a 20-year mortgage can be twice the initial amount borrowed so you will want to shave off as much of that interest as possible.
A proven method of lowering the cost of debt is to make extra principal payments toward the loan balance. This requires discipline and budgeting, but over the life of the loan making extra payments on the principal can save you lots of money.
Within the first 5 years of a loan, every payment is primarily interest. So make sure the loan terms you negotiate allow for monthly or at least quarterly principal payments without any penalties from the lender.
Also when negotiating your loan, make sure there is no pre-payment penalty. Go to the principal and save costs.
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Businessman, investor and real estate veteran Mario Carey shares thoughts on the economy, lifestyle, environment and The Bahamas of the future in this series.
