Borrowing money has become an integral part of our financial lives; and in today’s VUCA world, people may borrow to address various needs. Whether it’s for purchasing a new home or car, paying school fees, starting a new business or covering some unexpected expenses, borrowing can provide you with the much-needed financial assistance.
In our current situation, high inflation has already whittled away disposable incomes of most families, and therefore, it’s important for individuals to ensure they are taking the right steps to borrow responsibly.
Responsible borrowing is crucial for one to avoid falling into a debt-trap and ensure long-term financial stability and wellness. This article explores the concept of borrowing responsibly, the benefits derived from responsible borrowing, key principles to follow when seeking financial assistance and a perspective from the regulatory environment.
What is responsible borrowing?
This refers to the conscious and thoughtful use of borrowed funds while considering one’s ability to repay that loan. It requires one to make informed decisions prior to borrowing, distinguishing between needs versus wants, and prioritizing financial stability and well-being over instant pleasure.
Benefits of responsible borrowing
There are several benefits, both in the short and long term, that can be derived from responsible borrowing. A key benefit of responsible borrowing is that it provides access to financial resources to satisfy crucial needs, such as paying for tuition or buying that car or that home which otherwise may have been impossible to achieve.
Responsible borrowing helps one build and maintain a good credit history, enabling such individuals the chance to secure better interest rates or loan terms when they borrow in the future. It also helps one reduce financial risks or financial difficulties.
Key principles of responsible borrowing
The following are some key principles one must consider when borrowing responsibly:
Evaluate borrowing needs: Prior to taking on debt of any kind, it is very important to evaluate the purpose and necessity of borrowing. One must be able to clearly distinguish between needs and wants and consider alternative options, such as savings and grants or scholarships (for educational purposes).
Understand terms and conditions: It is essential to understand the loan terms, including the interest rates, repayment periods, and any other costs associated with the loan. One must read the fine print, ask questions, and seek legal advice if some of the terms and conditions are not clear.
Borrow within your means: Borrow only what you can repay without straining your financial resources. Calculate your monthly income and expenses to determine how much you can put aside to repay your debt. It is important to avoid borrowing outside your means as this will invariably lead to financial stress and potential default.
Shop around and compare lenders: It’s important to research and compare different financial institutions when considering taking on debt. Compare terms and conditions, interest rates and fees, and customer service, just to name a few. Speak with family or friends you know who may have borrowed from any of these institutions to help you make a well-informed decision. A well-informed choice can save you some money and help you avoid future issues.
Maintain a good credit score: A good credit score is crucial for future borrowing as it gives one access to more favourable options. To achieve this, ensure you make repayments on time as late or missed payments can negatively impact one’s credit ratings.
Financial education: It’s essential to seek some education about personal finance and debt management. One may attend workshops, read books and articles, or speak to financial advisors to gain the relevant knowledge to help one make informed financial decisions to avoid the debt traps.
Responsible borrowing from a regulatory perspective
While the Borrowers and Lenders Act 2020 regulates transactions between borrowers and lenders, the Bank of Ghana, in its notice to the public (BG/GOV/SEC/2023/03), has outlined what customers who borrow from financial institutions should consider when obtaining loans. It spells out clearly what customer obligations are with respect to borrowing responsibly.
Bank of Ghana advises potential borrowers to evaluate their ability to repay a loan, compare offers and fees across the industry, and ensure they have a copy of the loan pre-agreement before making that final decision.
Conclusion
In conclusion, individuals can be empowered to achieve their financial goals if they understand responsible borrowing and can master it as a skill. By adhering to the key principles and guidelines prescribed by Bank of Ghana, borrowers can minimise the risks associated with borrowing and cultivate long-term financial stability and economic well-being.
The writer is the Head, Lending – Stanbic Bank Ghana
