Today, Dear Readers, I have a question for you: Is there a difference between borrowing and financing? Don’t stress. I’ll tell you. There is. Both create debt and understanding the difference is important to your financial health.
You have to think of debt as a rope. You can use rope to lift, rescue, and tie things together. Or you can use it to hang yourself. Debt can improve your life or it can ruin it.
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 kinds of clothes, meals, trips and entertainment. We financed the house, the car and countless household appliances. It was all the same to me. I could have stuff now and pay later. I considered my juggling acts some kind of advanced high finance. 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 or dangerous debt, while financing creates secured or safe 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 from future income. With the 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 money you have not earned yet to pay for stuff you don’t have now or perhaps cannot even remember, is choosing financial bondage. It’s stupid and a crazy way to live.
Financing, on the other hand, involves collateral or “security.” The borrower pledges property, either real (such as a home or land) or personal, and agrees to liquidate that thing of value in the event he or she runs into repayment difficulty. In a financing situation, provision always exists so the debt can be canceled by virtue of the very item that is financed. You finance a car, for example. You come on hard times or change you mind. You sell the car and use the proceeds to satisfy the debt.
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 take a real estate purchase, for example. You decide to buy a home, and that cute three-bedroom on a pretty is a great option. 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 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.
Your future will be filled with options as you learn to say no to the kind of debt that can so easily turn into a noose.