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Apr 20, 2015

The Real Price of Borrowed Money

So what’s the real price of borrowed money? The quick answer of course is whatever the loan’s principal is plus interest and fees. And that’s true if you’re getting a loan from a bank or from small finance companies who might have given you a flier while you were walking to the office.

But in reality, it’s more common for us Pinoys to borrow not from firms but from family members and friends. For small entrepreneurs, “5-6” is another more common source of credit and many don’t seem to mind paying the high interest rates from these informal lenders for the convenience of having their lender drop by their store every day to collect the daily “hulog” or payment.

The answer to what the real price of borrowed money becomes a little more complicated than just interest and fees when your lender is a “kamag-anak” or a friend. When you’re the kamag-anak or kaibigan who was approached for a loan, there are a few things to consider before lending money to friends but when you’re the one who needs a loan, what should you consider before you ask for a leg up? Here are some food for thought.

Many Pinoys are hesitant to take out a loan because of “hiya” and that’s understandable. Having an “utang” has a negative connotation in our culture so it takes a lot to swallow one’s pride to ask for financial help.  How can you put a monetary value on something as intangible as pride?

The same goes for collecting debt. A friend or relative, especially close ones find it hard to approach you when you owe them money. It takes pride swallowing and even a certain amount of risk. For some reason, there are those people who antagonize the collector instead of knowing that debt should be collected and repaid after a fair amount of time. This happens more often when the lender is well-off and has a lot to spare. For some reason, we tend to think that well-off kamag-anaks owes us and are obligated therefore to lend us money without the pressure of having to pay it back on-time.

How Strong Is Your Relationship?
Borrowing money, and owing a debt, can put a strain on a relationship. Money problems are a big reason why couples split up and if you’re borrowing money from a relative or a friend, it can definitely strain your relationship if you’re unable to pay the debt. 

To avoid losing a friend or falling out from the good graces of your ninong, make sure that you prioritize paying whatever you borrow. If the amount you need is above your ability to repay soon, be honest about it and ask them if they understand that it will take you time to repay it all back. Don’t let a good friendship go to waste over money.

Friendships don’t just end because you have a debt. When word gets out that you have debt, it causes a lot of hurt feelings. One consequence of having a debt is that people can talk about it. It’s still connected to the negative connotation that we have about debts so that’s another thing to consider before you borrow money.

The Price of Lost Opportunity
Money deposited on a savings account earns interest, and money invested on investment machinery earns even more. Owing someone cash, is owing someone lost opportunity. Not just the opportunity to spend it on something that they may want or need at the time, but also the opportunity of investing it and growing that money.

This is most especially evident in times of emergency. This may not be a case of missed investment opportunity. But in cases where the lender failed to save up for emergency, the money that could have been used for the unexpected expense won’t be there. In such cases, stress will be the least of the lender’s worries. Coming up with the sum would often require them to take borrow or take up a loan themselves, which in turn will gain interest. These situations will cost the lender more than it should have had if he hadn’t lent the money in the first place.

Is Money What You Really Need?
Sometimes, it’s easy to believe that money is the solution to your problem but a lot of the times when you might discover that something else may be a better solution. When you find that you’re chronically low on funds that prompts you to borrow money, it may be time to assess whether your source of income is enough and it may be time to augment it or to find another job that pays more. Or perhaps you’re spending too much on some things and you need to cut back on these expenses to avoid borrowing money. To live within your means is an advice we hear over and over, and is one advice we should adhere to for us to avoid having to borrow money unnecessarily. 

These are some of the things to consider before you borrow money from a relative or a friend. Lots of times, you can avoid paying an interest for this loan and this is one reason why many choose this option over getting a personal loan or getting a cash advance from a credit card. But they still have costs that you need to be aware of and weigh before you suck up your pride and ask for help.

This post is brought to you by:
MoneyMax.ph is the Philippines’ leading financial comparison site where you can save money by comparing financial and car insurance products and services – fast, comprehensive, and free. We aim to give the power of smart purchase decisions back to Filipino consumers by providing everything they need to become financially savvy. 
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