KNOW YOUR CREDIT MARKETS FOR SENSIBLE BORROWING
· Most households need to consciously match their expenses with income.
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Financial goals and investment plans may falter if transactions do not match our income.
· However, some borrowing may be inevitable to match the expenses that spill over.
· We can then exercise choices available in the informal and formal credit markets.
1. Informal credit markets
· These enable households to manage their short-term requirement for cash.
· These arrangements are only between people who know one another.
· Here, familiarity becomes the security, and social pressures to repay on time are high.
· Credit is offered with minimal fuss or delay and there is limited or nil paperwork.
· However, default is viewed very seriously and mostly ends the ability to borrow again.
· It also may lead to the loss of asset pledged or loss of face, honour and relationship.
· The cost of such informal credit can be as low as zero or very high, on case-to-case basis.
· Credit from your grocer, or interest-free loan from friends and relatives, are examples.
· Some even borrow from their employers and repay in instalments.
· Informal groups also form chits, where small amounts are contributed regularly, and the lump sum is made available every month to a member chosen by a draw of lots.
· Gold and silver, pawned to a nearby moneylender, fetches lump sum loans, which are repaid in smaller instalments.
· Usurious loan is also available from the local moneylender, who gives unsecured loans at high rates of interest.
2. Formal credit markets
· These are managed by banks and non-banking finance companies (NBFCs).
· Banks offer overdrafts, personal loans and credit cards.
· NBFCs offer loans against security of deposits, investments, gold and property.
· Formal loans are offered without the condition of familiarity.
· Therefore, the lender requires documentary proof of income, record of repayment capability, credit scores, and security in the form of an asset before offering the loan.
· However, the formal credit market offers anonymity, as the transaction is not known to immediate social circles, and there is no burden of being identified as a debtor.
3. Tips for making best use of these credit markets
· Build a good credit track record with your friends, relatives, employers and bank by keeping your word on repayment.
· Be realistic, and keep your borrowing in line with your ability to repay.
· Ensure arrangements are in place to borrow at short notice, when need arises.
· Allocate the assets you will need to offer as security, and keep them in good order.
· Exhaust the cheaper sources of funding, before taking the expensive ones.
· Have a fool-proof plan to repay, so you are able to borrow again, if needed.
· Allocate any lump-sum earnings to repay and end loans, to refresh your borrowing ability.