Borrowing Money

Thinking about borrowing money in a different light

Think about a simple house mortgage. Let’s say you decide to borrow $100,000 over a 30 year term, and let’s say the rate is a fixed 5% for the life of the term (just to keep it simple). By the time you’ve paid off your mortgage, you’ll have paid nearly double that amount for your house (over $90,000 in interest charges).

Now, chances are, when you first applied for the loan you were required to have a deposit of your own. Let’s say 10% of the purchase price. Most people who apply for mortgages only manage to make the minimum deposit required, and borrow the rest. And chances are, when they sit down with their mortgage lender (or any other loan for that matter), the final figure of the total cost of the loan will have been disclosed to them in one way or another. But how many people are ever put off by how much they’ll EVENTUALLY pay? Most people only care about the monthly payments, and if they can afford them. And this is where commonsense and logic flies out of the window.

A more simplistic way of looking at borrowing money is to put it in terms of borrowing apples. Let’s say you approach the bank and ask to borrow 100,000 apples. The bank agrees, but says, ‘OK, for each apple I give you, you not only have to give that apple back later on, but you also have to give me one more apple for each one I give you”. When put like that, most people would think that kind of a deal preposterous and try not to borrow as many apples in the first place, or would try to negotiate better terms. Unfortunately, when we’re talking about money and the deal is that we have to pay back, over time, twice the initial loan amount, not many people bat an eyelid and simply sign on the bottom line.

So next time you’re considering loaning money, try thinking about it from another perspective. Try substituting a dollar note for an apple, orange, golf ball, or anything else you can identify with. Work out exactly how many golf balls you’ll have to give back for each golf ball you’ll borrow, and then ask yourself if it’s worth borrowing all those golf balls now, or whether it’s better to save a few more golf balls yourself, and borrow less.