We live in the world of contradictions and conundrums; and to a degree this is what makes it interesting and entertaining. For instance, have you watched people driving to the gym and parking as close to the entrance as possible? This is what I’m talking about! But this doesn’t only happen to the ones unfortunate enough to have realised the need for exercise and still resist doing it; it is also the kind of thing to which personal finance is not immune.
Some time ago I wrote about the Matthew Effect in personal finance: wealthy people not only get more but they also need to spend less. For example, people with high income have financial opportunities, like bank accounts offering free access to Airport lounges and insurance, that are not open for the mere financial pariahs – and this, by the way is most of us.
While thinking about the contradictions and conundrums of personal finance, however, something else sprung to mind. It is the following:
Cheap credit is available only to people who shouldn’t be needing it; people who would benefit most from cheap credit have no chance of getting it.
Weird, uh? Or maybe not that weird, may be just something that has been underplayed for a very long time. After all, it’s been long known that, as Mark Twain put it,
“A banker is a fellow who lend you his umbrella when the sun is shining and wants it back the minute it begins to rain.”
Further, this conundrum is a place of moral battleground. Personal finance bloggers and other professionals keep issuing warnings against borrowing in general and particular type of borrowing in particular. It is also an established mantra that people who are desperate to borrow shouldn’t do so ignoring the possibility that people who are down on their financial luck but have ‘a plan’ may be the ones who benefit from borrowing most.
Whatever we may think about borrowing and its virtues and vices, the fact is that in 2008 the Glazers – the family who own Manchester United football club – borrowed a total of £10 million (about $15.5 million) at 5.5% interest for ‘general personal purposes’. At the time, the average interest charged by banks was 11.44% but they borrowed the money from the club they own, you see. Meanwhile, a single mother employed part time and having no money, who wished to borrow for ‘general personal purposes’ is likely to have to check the multitude of short term loans providers who have sprouted during the last decade or so.
To add insult to injury, most of the personal finance industry rides their high moral ground horses, creating the impression that poverty is a personal issue when in fact, more often than not, it is a structural problem. Many people are caught up in a cycle of deprivation: they have no money because they’re unemployed; they are unemployed because their skills set has become redundant; they need to acquire a new set of skills to be able to get a job and get out of their financial predicament; to do that they need resources to invest in acquiring the skills set; they don’t have this resources at their disposal.
I may be wrong here but it seems to me that one way to break this cycle is to borrow and invest in developing new skill-sets. There is not much wrong with people who are hard on their financial luck borrowing; it is all down to what they borrow for. Borrowing for consumption (apart from an extreme situation where the choice is borrow or your children starve) is not a thing to do; borrowing for personal growth and re-qualification is a must.
Here is the problem: the people who could potentially benefit most from borrowing have access only to relative expensive options.
What are the options?
Borrow from family and friends
I originally come from a culture where borrowing from friends and family when one had no money used to be a given. This kind of behaviour though is never about money, or never simply and only about money. It is about close kinship, love, care and the moral obligation to help and support your nearest and dearest. Interestingly, these ‘informal’ money relationships go hand in hand with economies that industrialised relatively late.
Today, borrowing from family and friends is generally frown upon. But even leaving this aside, it is likely that the kind of people who really need to borrow know very few people who have the spare cash to lend them. Hence, this option is a bit more realistic than borrowing from a High Street bank but a very little bit.
Borrow from short term loan providers
This is probably the most common route people follow. We may decry this kind of loans but there are, I believe, five conditions under which these may work out to one’s advantage. These are:
- Make sure the borrowing is not for consumption but it will ‘pay off’;
- Make sure there is definitely money coming in to pay off the loan;
- Make sure the lender is regulated;
- Avoid lender that offer very large loans at very light conditions and/or don’t state clearly the conditions for repayment;
- Make sure there is definitely money coming in to pay the loan off.
Well, spotted: condition two and five are identical and this only tells you how important this is!
Borrow from peer-to-peer landing scheme
This is another possibility though people deemed to be a less than perfect ‘credit risk’ (this means low risk, really) ought to be prepared to pay higher interest rate. Also, all conditions set-out under the previous part are a valid check-list.
Ideally, I would like to live in a world where people don’t need to borrow. However, the world we live in is far from perfect and many are caught in a cycle of financial deprivation, unemployment and poverty where the way to break out needs an injection of resources. Just borrow wisely!