As one of the greatest investors of all times ‘Warren Buffett’ once said “I’ve seen more people fail because of liquor and leverage – leverage being borrowed money. You really don’t need leverage in this world much. If you’re smart, you’re going to make a lot of money without borrowing.” This is true but emergencies or needs in the short term or mismanagement may lead you to take some responsible debt. Here is a reckoner on traditional & some new nontraditional ways to borrow money.
We borrow to buy a car or bike, to buy a house, for a child’s education, to meet sudden medical needs, and sometimes to buy things like a television or mobile phone also.
With relatively easy access to credit, some people do not think twice before splurging on the latest technology or whatever it is that takes their fancy.
This is where responsible borrowing comes into play.
Borrowing is not always evil. It does serve a good purpose. It is not necessarily a sign of failure; rather it can be a step in the direction of growth. For eg a House Loan or an educational loan.
Once concluded that borrowing is essential to meet the need in hand, the next step to decide is the exact amount that is to be borrowed and the source of borrowing.
Some traditional Ways to Borrow Money
- Banks
- Non-Banking Finance Companies (NBFCs)
- Taking money from personal savings and investments
- Sell or redemption of certain types of investments (for example, mutual fund units or listed shares) to meet the immediate need of funds.
- Premature closure of your fixed deposit is also a relatively low cost financing option.
- Some other options include withdrawal from Employee Provident Fund or Pension account.
- Request your insurance company to surrender the policy and pay you the surrender value.
- Finance against gold / jewellery
- Loan Against Securities
- Credit Cards
- Borrowing from friends and family
- Borrowing from Sahukars / Unauthorized Money Lenders
New Ways to Borrow Money
Reverse Mortgage Loan
A Reverse Mortgage Loan (RML) is a great way for supplementing current income/pension income in the form of a regular stream of cash inflows to cover genuine expenses of senior citizens.
This is a very good option for the asset-rich – cash-poor category of senior citizens who have a clear title to their residential house property. In this option, the bank or lender provides money against the mortgage of the residential property in its favor for a specified period.
The borrower gets either a lump sum amount or in installments. If one of the borrower’s spouses dies during the loan tenure, the other can stay in the home until the loan tenure. If any of the spouses continues to live beyond loan tenure, they can stay in the home until death but will not receive payments. The lender is compensated upon the death of the borrower in form of transfer of title of the property to its favor or repayment by legal heirs of the borrower.
This option though quite prevalent in western countries is not popular in India due to many reasons including a lack of understanding and awareness of this option.
P2P (Peer to Peer Lending)
Also called crowdfunding, this is a way in which you can borrow amounts from hundreds of financers who are registered with a platform.
They lend small amounts like Rs 500 or more, and when hundreds of them combine it becomes a huge sum. Here the role of the platform is very important to register & carry out due diligence of both – Borrower & Lender.
Faircent, Liquiloans, Cashkaro, LenDen, Finzy are some these platforms in India. All these are regulated by RBI under NBFC Guidelines.
How to choose the option for borrowing?
Each of the above-mentioned options of borrowing has some advantages and limitations. Because of the specific features of each option, it is really not easy to do a straightforward comparison among them.
The best way is to write down all the costs associated with different options available to one, analyze them carefully and then select the most appropriate one. Apart from factors like the ease in availing of a particular borrowing option and the time required for it, other factors which must be included for comparison of various options are:
- What is the amount available in that option,
- What is the schedule of disbursement of the loan amount (lump sum or staggered),
- What is the repayment schedule,
- Consequences in case of delay and/or default of payment,
- The cost involved for pre-payment of loan,
- Sundry charges associated with the option (processing fee, documentation charges, legal charges, verification fee, etc.
- Tax liabilities (for example, taking a home loan from a bank may be a better choice than digging into investments or savings as it offers tax rebates to borrowers), etc.
Borrowing is a double-edged sword, it can be a ‘boon’ or a ‘bane’ depending on when and how you use it. The need of the hour is thoughtful spending. And, thoughtful spending is directly proportional to ‘responsible borrowing’.
