Finance Course 3

Session 3   Borrowing Interest and Repayments

 

 

1. WHAT DOES THE BIBLE SAY ABOUT BORROWING

 

The bible doesn’t prohibit borrowing but neither does it encourage borrowing.

 

Let’s consider the following biblical principles with regard to borrowing.

 

Debt is not normal

 

When we “Diligently obey  … the Lord will open the heavens, the _________of His ______ …. to bless all the ______of your _______…; and you shall ______to many nations, but will borrow from _____.” (Deuteronomy 28: 1 – 12).

 

Do not be conformed to this world (this age), [fashioned after and adapted to its external,             superficial customs], but be transformed (changed) by the [entire] renewal of your mind [by         its new ideals and its new attitude], so that you may prove [for yourselves] what is the good       and acceptable and perfect will of God, {even} the thing which is good and acceptable and              perfect [in His sight for you]. (Romans 12:2 )

 

At best, God intended us to be lenders and not borrowers. Regardless of how it seems today, debt is not normal in God’s economy and should not be normal for God’s people.

 

The borrower is absolutely obliged to pay

 

The wicked borrow and do not repay, but the righteous give generously. (Psalm 37:21)

 

And the next day he took out two denarii  [two day’s wages] and gave [them] to the innkeeper, saying, Take care of him; and whatever more you spend, I [myself] will repay you  when I return. (Luke 10:35)

 

Then she came and told the man of God. He said, Go, sell the oil and pay your debt, and             you and your sons live on the rest.( 2 Kings 4:7)

 

Keep out of debt {and} owe no man anything, except to love one another; for he who loves his neighbour [who practices loving others] has fulfilled the Law [relating to one’s fellowmen, meeting all its requirements]. (Romans 13:8)

 

Taking on more debt than you can repay neither protects your assets nor engenders the honour and trust on how believers are called to conduct their business affairs. God requires of us that we keep our promise. “It is better that you should not vow than that you should vow and not pay. (Ecclesiastes 5: 5)

 

 

God’s minimum

 

The absolute minimum that God’s word establishes for any borrower is found in Psalm 37:21 “The wicked borrows and does not _________ but the righteous is _____and _________”. If we don’t want to be counted among the “wicked”, we must repay any debt we owe.

 

It really doesn’t matter if the circumstances are beyond our control. If we make a debt, we’re stuck with it. It may mean many years of sacrifices to pay even the minimum amount to creditors, but the peace of God is more valuable than the world’s wealth.

 

“A good name is to be more desired than great riches, favour is better than silver or gold.” (Proverbs 22:1)

 

 

Avoid Surety

 

“Do not be a man who strikes hands in a pledge or puts up security for another’s debts; if you lack the means to pay, your _____will be snatched from _________” (Proverbs 22:26-27)

What does surety mean?

 

Accepting an obligation to pay someone else’s debt, without having a guaranteed way to make the repayments.  Surety means that we presume upon the future. If things go wrong we may be left in debt.

 

Believers who are in business have the dilemma that they are often called upon by banks and suppliers to sign as surety for the Company that they are involved in. Suretyship usually covers the liability of others who have an interest in the company. Note : “If the Company cannot sustain its borrowing requirements, then neither can I” Tell that to the bank and see how quick they change their requirements. Golden rule is don’t be bullied into guarantees and suretyships.

 

Collateral [putting up an asset as security] for another persons loan is the same as above. Avoid like the plague.

 

Conclusion

Although borrowing is not directly prohibited in the Word of God, it is not encouraged either. It is important to remember that credit is not the problem; it is the misuse of credit that causes problems.

 

 

2. DEFINITIONS

 

 

BORROWING

 

“Borrowing” is the need to use someone’s services, goods, or money today, with the view that you can repay or pay for it with future generated income. When we borrow something, we are given permission to use it for a period of time and we usually have to pay for this, for example, if we are hiring a car, we are, in fact, borrowing it and we pay to do so.                                             .

We can also borrow money. Borrowed money is called a loan or credit. The price we pay to borrow it is interest. The actual amount that we borrow is the principal  or capital amount.                                .                                         

 

INTEREST

 

 

What is interest?

 

You pull out your credit card and that gorgeous pair of shoes is yours. By handing over your card, you agree to buy now and pay later. But then you receive you bank statement at the end of the month, and there it is on your account – the extra amount marked as ‘interest’. This is what you pay for the use of the money that you have borrowed.

 

The rate of interest is influenced by the rate at which banks borrow money from the reserve bank, the cost of the loan and the risk that the borrower represents to the lender.

 

Interest can be either variable or fixed. Variable rate means the interest rate might change during any period of the loan term, as written in the contract. Fixed rate means the interest rate does not change.

 

 

Nominal and effective interest rates:

 

The nominal interest rate is the interest rate you are quoted by a bank or other institution when lending or borrowing money. This is the interest rate without taking inflation into account. But when you borrow money, the loan can be compounded at different intervals: monthly, annually, and so on. When you take this compounding effect into account, you get an effective interest rate. Ask for the effective interest rate, not just the nominal one, as this can make a big difference.

 

How interest is calculated

 

Interest is calculated as a percentage of the outstanding balance of your loan, generally on a daily basis, which is then capitalized to your account monthly. This means that the daily interest is accumulated and added to your balance at the end of the month.

 

For example:

 

If you take out a R 100 000 home loan at 11% over 20 years, you will be liable for a repayment of R1 032 per month. In the first month of the transaction, R917 amounts to interest and R115 is the amount that you will have paid off the capital amount leaving a balance owing of R 99 885.

 

Makes one think! Imagine what you will have paid after 20 years.

 

 

What is Collateral?

 

A loan can be secured by collateral. Collateral is normally considered as an unencumbered asset that you pledge to the lender as security against a loan. You actually promise to give to the financial institution this asset if you do not pay back the loan.

 

Some of the items which can be used as collateral are shares or cash deposits or endowment policies. When a loan is secured, the financial institution can liquidate the item if you do not repay the loan.

 

 

 

 

 

 

 

3. CONSEQUENCES OF BORROWING

 

 

Borrowing consumes resources through interest payments. The price of your purchase increases when you have to make interest payments. The cost is higher than most can imagine. Often you are still making payments after the item you purchased has depreciated, broken or become outdated.

 

Borrowing fosters impulse buying. This occurs when decision are based solely on the whim of the moment rather than prayfully considering the decision. “Haste leads to ___________” (Proverbs 21:5)

 

Borrowing interferes with God’s provision. God has promised to meet the needs of His children. He wants you to put your trust and faith in Him, rather than in a line of credit. “For the eyes of the Lord run to and fro throughout the whole earth, to show Himself ________on behalf of them whose heart is __________towards Him.”

(2 Chronicles 16:9)

 

Borrowing represses creativity. There may be an alternate means to obtain the required item which you have not yet explored or acted upon.

 

Borrowing presumes upon the future. Not knowing what the future will hold, you obligate yourself to making payments.

 

 

4. THE COST OF BORROWING

 

Before buying anything on credit, make a quick calculation to determine what the real cost will be, including the interest. You might just change your mind.

How to estimate the cost of an item purchased on credit:

  • Take the number of payments you will be expected to make over the lifetime of the facility.
  • Multiply the number of payments you are required to make by the amount you are expected to pay monthly. This will give you the total cost of your debt.

Compare this amount to the cash price of the product that you want to buy; the difference is the finance cost you will pay to finance the debt as opposed to paying cash.

5. TYPES OF BORROWING

      

HOME LOANS

 

What is a home loan?
The most common form of home loan is money lent by a financial institution—usually a bank—for the purchase of a property. The loan amount includes the capital (purchase price), interest and often also transfer fees and other costs. The lender will usually require security for the loan. In most cases the lender will register a mortgage bond against the property, which has the effect of protecting its interests until the loan is repaid.

 

In the early stages of paying off your home loan, a significant portion of the monthly installment goes towards settling the interest on the loan. As the outstanding balance comes down, the monthly interest decreases and a larger portion of your installment is used to reduce the capital you have borrowed.

 

Since you’re the one who will be doing the paying, it’s a good idea to know what you can afford before you go setting your heart on a new home. In addition to the purchase price, you would need to come up with a deposit, plus money to cover transfer duties, and other financial charges, insurances, and don’t forget the interest!

 

How much can I borrow?

 

Chances are you and your mortgage lender will disagree on how much you can afford. Lenders tend to go by a rule of thumb that limits monthly home loan repayments to a certain percentage of your joint household income, usually 25-30 %. But your income is not the only yardstick—most banks insist on a clean credit record, regular employment, and a statement of assets and liabilities.

 

One way to set a realistic buying target is to pre-qualify. Any lender will run a test on your behalf, though the many online options are the quickest and easiest route to follow. As a pre-qualified buyer you’re in a stronger negotiating position, and better placed to move quickly should the right house come your way.

 

There are several ways to pay off your home loan faster and substantially lower the interest paid.

 

  1. Increase your repayments. You can save a significant amount in interest by paying a relatively small additional sum of money into your home loan each month.

For example, if you have a loan of R 100 000 at 11% interest repayable over 20 years, your monthly repayments will be R 1032.If you pay an additional 10% of your installment – that is R103 extra – each month, you will settle your loan is just over 15 years, saving approximately  R 42 220 in interest.

 

  1. Make Lump –sum deposits. You can save a significant amount of money in the long term if you deposit any additional income you receive into your home loan account, thereby reducing the outstanding balance.

 

  1. Pay earlier in the month. Most people pay their home loan installment on the last day of the month. However, you will pay less interest if you pay your installments earlier every month.

 

There are several calculator tools available on the major bank’s websites, which enable you to calculate what the cost of a bond would be, what your repayments would be and the effect of paying earlier or increasing your monthly repayment.

 

The “Sunday Times, Business Times”  – also has a useful tool on its website to calculate repayments.  www.btimes.co.za/calc/mort.htm

 

VEHICLE LOANS

 

A car is likely to be your second most expensive purchase after a house. Most vehicle finance companies extend credit for a 54 month period. The interest rate is influenced by your risk profile, and whether the vehicle is within your price range. It is very important that you buy a vehicle that you can comfortably afford.

 

Is a car loan intelligent borrowing?

(Refer the article by Mary Hunt above)

 

A car loan can contain elements of intelligent borrowing provided you make a large down payment and select a model that historically retains high resale value.

 

A vehicle loan is a secured debt; if you get into some kind of trouble, you can sell the car to repay the debt. Cars do not appreciate, however, so not all of the intelligent borrowing criteria apply.

 

A car loan can slide over to the stupid debt area if you put little or nothing down and stretch the payments past five years. It won’t take long for you to be “upside down” in the loan, meaning you owe more than the car is worth.

 


PERSONAL LOANS

 

In today’s consumer based market, there is very strong competition amongst money lenders to win over clients with the most attractive loan deals. You will be faced with an over-abundance of packages when looking into loan possibilities and not all of them will be suitable for you.

 

The most important thing is to do adequate research and shop around as much as possible. Most loans today are repaid on a monthly basis, spread over a period of one to five years, depending on the size of the loan.

 

Remember, Banks and suppliers like you to borrow as MUCH AS YOU CAN as they make large profits from the amount they charge you for taking time to repay for the service, goods or loan.

 

 

Types of Loan – Secured or Unsecured

 

There are two main types of loans, namely secured and unsecured.

 

A secured loan is one where you give some kind of surety or guarantee to the lender, in most cases this is property. The lender’s risk of default is reduced, which means the advantages of a secured loan can include lower interest rates and longer repayment periods on larger amounts of money. The most important thing to take note of is that when you see the notice ‘Your home is at risk if you fail to keep up with repayments’, it means just that. It is therefore worth considering the risk of losing a valuable asset were you to be unable to keep up your repayments.

 

Unsecured loans simply mean that you do not have to give any form of guarantee and the lender trusts in your ability to uphold repayments. Rates of interest are normally higher, and maximum loan terms are considerably shorter, but even so, this period is normally adequate for most borrowers’ needs.

 

At the end of the day, banks are in this business for money, and the way they make it is through the interest you pay on your loan. The interest rate applied is called the Annual Percentage Rate (APR), and your main priority when considering a loan is comparing as many APR’s to determine which products are the most competitive and which are suited to your needs. There is a huge variety of rates available, and just because a lender says it has ‘special offers’ for its customers does not mean it is the best deal.

 

 

There may be an imposable fine if you were to repay your loan before the agreed time, this can be anything from a set amount, to the outstanding amount of interest on your loan. It is worth thoroughly equating the amount of time you require to pay your loan back so as to avoid unnecessary penalties.

 

Deferred repayment, or payment holidays might leave you with a break from monthly repayments, but interest will continue to accrue, and this may result in increased monthly repayments after your break.

 

 

 

CREDIT CARDS

 

Credit cards are extremely useful if used correctly. They save you the hassle of carrying cash and are generally accepted world wide. However, if you are undisciplined in using your credit cards, they can drag you down into a debt trap very quickly.

 

Most credit card companies offer an interest free period of 55 days. This means that if you pay your account in full every month, you will not pay interest during the billing cycle (30 days) plus the period until the payment is due, which is normally 25 days later.

 

However, remember that cash withdrawals and fuel transactions will always attract interest even if your account is paid in full.

 

If you spend regularly on your card, for everyday purchases such as groceries and petrol, and never carry your debt over to the next month, the interest rate on your card is irrelevant as you’ll never be affected by it.

 

 

STORE CARDS

 

Although individual store cards might initially seem like an attractive alternative, with offers like credit bonuses or initial purchase discounts, they are very likely to have much higher interest rates than credit cards and an outstanding balance on a store card can very quickly grow into a much larger bill than the original purchase.