BDO Money Matters | By Mark B. Aragona for Yahoo! Southeast Asia – Fri, 23Nov2012
How do you know if borrowing money is going to work out for you, especially in the long term? You can’t foresee what unexpected events will happen to you in the next few years, but there are some things you can control: planning your finances and setting up a worthwhile goal. Have a look at these traits of a good borrower and see for yourself how you—or people wanting to borrow from you—stand:
Credit-worthiness. These are traits from the bank or financial institutions point of view and have to do with the applicant’s credit history, their capacity to pay, and in some cases, the value of their collateral. Banks in particular like to lend to people with high net worth, stable incomes, have a good loan payment history, and liquid assets that produce income or value. But if you don’t rate very high on one or more of these aspects, you could possibly balance it off by doing well with another. Start by taking steps towards improving your credit-worthiness.
On the borrower’s side, there may be more desirable traits to have:
Keen money management skills. This includes a solid grasp of one’s cash flow, the ability to live within your means, and the skill of keeping accurate and timely financial records. The last item is invaluable for obtaining a loan, as banks will require not just proof of income, but proof of residence, marriage, ownership of assets, and so on.
A sense of integrity. The big “I” means you walk your talk: if you borrow a certain sum of money, integrity means paying back the agreed sum on time. Keeping your word is the basis of all financial agreements and is often the most overlooked trait. The lack of integrity is the main reason for a long history of lost wealth and damaged relationships—both business and personal.
A sense of prudence. A good borrower does not bite off more than he can chew. He will only borrow what he can pay and tracks whom he borrowed from. Some borrowers are not done in by the size of their debts, but by the sheer number of them: they get loans from so many sources, juggling money to pay and repay creditors, that they’re overwhelmed by the task of organizing and keeping track of whom they borrowed from and how much they owe. Ideally, one borrows from a single source at a time, and consolidates any other existing debts into a single low-interest one.
Purposeful spending. Perhaps the best indicator of a successful loan is what you ultimately do with the extra cash: is it going to provide you with greater value, or is it just going to take more money out of your pocket? Thus it’s imperative to be clear with your financial goal: that you are borrowing money to pay for or take care of a valuable asset. This may mean buying a home, a business, perhaps another investment. It may mean investing in people, such as educating yourself or a child.
Of course, credit no-nos include borrowing to gamble—such taking imprudent high-risk investments—or spending on luxuries. These sap your income and will eventually leave you selling off your possessions, or worse, running from debt collectors.
Borrowing isn’t bad if you have a solid purpose, a good grasp of your financial status, and the commitment to honor your agreements. By mastering these qualities, loans become a useful tool.