As of Friday, April 5, 2013
Pop quiz! Is there a difference between borrowing and financing? No need to stress — I’ll tell you. There is, and understanding the difference is very important to your financial health.
Debt is the result of both borrowing and financing. But think of debt as a rope. You can use it to lift, rescue and tie things together, or you can use it to hang yourself.
I used to think borrowing and financing were the same. I considered myself involved in high finance with my bevy of credit cards. I charged all sorts of things like clothes, meals, trips and entertainment. We financed the house, the car and countless household appliances. It was all the same to me. Bottom line, I could have stuff now and pay for it later. I considered my juggling some kind of advanced high finance, and I had to learn the difference between borrowing and financing the hard way.
Borrowing is the temporary use of a thing or money, while financing implies the management of assets or money. Borrowing creates unsecured debt, while financing creates secured debt.
Borrowing is hazardous to your financial health because it offers no alternatives — no escape routes. You borrowed the money, and you must pay it back. And with unsecured debt, you’ve eliminated options. Mountains of unsecured debt can tie a person to an undesirable career, squelch opportunities or create heavy burdens that are often unbearable. Depending on future income to pay for today’s purchases is choosing financial bondage. That’s a crazy way to live.
Financing, on the other hand, involves collateral or “security.” The borrower pledges property, either real or personal, and agrees to liquidate that thing of value in the event he runs into repayment difficulty. In a financing situation, provision always exists so the debt can be canceled by virtue of the value of the item financed. Financing allows a person to use assets to achieve a more useful or productive result. Financing is a safe, realistic and reasonable way to purchase a home, for instance. The value of the home secures the repayment.
Financing does not presume unreasonably on the future. Let’s look at a real estate purchase, for example. You decide to buy a home, and that cute three-bedroom in the ‘burbs seems like a great idea. For now. But 10 years from now, you might develop an unrelenting urge to move to Tibet. Even though you still owe $190,000 on the house, it’s no problem. You sell the property, pay off the loan and head for the hills.
If that $190,000 represented borrowed funds — an unsecured debt — you’d probably be stuck, left to only dream of what mountaintop life might have been like had you not so foolishly borrowed away your future.
Learn to recognize the difference between financing and borrowing, then avoid borrowing like the plague. Keep any debt confined to secured, safe debt. As you learn to say “No!” to debt that could turn into a noose, your future will remain open to options.
Mary Hunt is founder of www.DebtProofLiving.com.
You can email her at email@example.com, or write to Everyday Cheapskate, P.O. Box 2099, Cypress, CA 90630.
To find out more about Mary Hunt and read her past columns, please visit the Creators webpage at www.creators.com.