How to Borrow & Lend Money
To build wealth, it is critical that you learn how to both borrow and lend money on good terms. When borrowing money, you will work to negotiate the lowest interest rates. When lending out money, you will balance potential risks versus rewards when setting interest rates as a creditor. To accelerate the growth of your bottom line, you will employ a technique referred to as leverage. Leverage works best when you borrow money to buy assets that generate cash flow at higher rates of return than your underlying debt.
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Instructions
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Borrowing Money
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Identify your purpose for borrowing money so that you may comparison shop for the right type of loan. For example, you would take out a mortgage to buy a home, and take on margin debt to purchase bonds through a stockbroker.
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Order a copy of your credit report through AnnualCreditReport.com. Verify that your credit report information is correct before you complete an application to take on more debt. Each credit-reporting agency -- Experian, Equifax and TransUnion -- provides online resources for you to file disputes.
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Pay down expensive credit card debt to minimal levels. While paying off debt, you should also work to build six months worth of your living expenses in cash reserves. These moves improve your chances of securing a loan at a competitive rate.
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Classify loan interest rate structure as either fixed or variable. A fixed-rate loan charges the same interest rate throughout its term. A variable-rate loan, however, features rates that shift with the economic environment. As a conservative borrower, you may prefer fixed-rate debt so that you can budget around regular payments.
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Monitor the federal funds rate through "The Wall Street Journal" as a benchmark for all interest rates. Banks loan money to each other at the federal funds rate so that each bank can meet its Federal Reserve requirements. For their consumer loan offerings, banks charge higher rates relative to the federal funds rate to compensate themselves for taking on more risk. You can expect low interest rates amid recession -- when loan demand is weak.
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Apply for the same type of loan at three different financial institutions. You should take out a loan with the bank that offers the lowest interest rate.
Lending Money
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Pull up an online financial calculator and toggle through investment projections. With the calculator, you can determine the amount of money that you need to save at a projected rate of return to arrive at a future value of cash.
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Evaluate credit securities in terms of risks versus rewards. Bank deposits, U.S. Treasuries and money market securities are the safest ways to lend out money, but offer small returns. Junk bonds are high-risk investments, but they provide you with better opportunities to leverage the cash proceeds from your own debt at a profit.
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Create a diversified investment portfolio according to your financial goals. As you age and near retirement, you should pay down your debt and purchase more government bonds and money market investments to reduce risks.
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