Borrowing Basics – Part One

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With numerous loans and credit cards offered by financial institutions in the market today, you may be tempted to spend more money than you actually have through borrowings.

Borrowing from financial institutions allows you to obtain money on loan or get a line of credit to enable you to buy a house, car, pay your bills or even go on holidays.

Although a loan is beneficial, particularly in helping you pay for big purchases, it is crucial for you to keep in mind that the money you borrow is not free. Money on loan needs to be paid back with interest and penalty charges when it is repaid late.

Credit and Debt

Credit is a facility to borrow with an agreement to repay the creditor, as per the terms and conditions outlined in the contract.

When you borrow, you are taking on credit and when you use a credit facility you are taking on debt.

You are given a credit card with a limit of RM3,000. If you have spent RM1,000 on your credit card, that RM1,000 of utilised credit now becomes a debt.
BEFORE : RM3,000 credit available
AFTER : RM2,000 credit still available
RM1,000 debt owing

Why do you borrow?

When you borrow, you need to ask yourself what is the purpose of your loan. Keep in mind that you should only borrow to meet your needs and not your wants.

When you want to take a loan or use a credit to purchase something, ask yourself the following questions:

Is the product or service I intend to purchase is a need or a want?

  • Can I afford to pay the instalments?
  • If it’s a substantial purchase, such as a car or house, can I pay a larger down payment?

Rules of Borrowing:

Borrow for productive purpose only and for something that you really need but do not have enough cash to pay for. This includes buying a house or car, sending your children for further education or meeting emergency needs.

Borrow within your means. You should only borrow an amount that you can pay back comfortably. It is recommended that you gross total monthly repayments should not exceed 40% of your gross monthly income.

A borrower has a moral commitment to repay as there should be no excuses for not repaying your debts. Always bear in mind that your creditworthiness will be affected if you do not repay your loans according to the terms repayment.

Here are some examples of productive debt versus unproductive debts.