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    Borrowing lessons for individuals

    Gone are the days when borrowing was considered bad in Pakistan. With government offering tax benefits on home loans and educational loans, habit of borrowing has started sinking into the DNA of Pakistani middle class. Today borrowing is not just confined to the essential need such a house but has also got spread to comfort and luxuries such as buying a car, white goods or the latest craze of fancy gizmos. While borrowing money may serve the purpose of buying goods and services which cannot be bought otherwise, it does have critical elements of responsibilities that it brings. Every borrower needs to be a responsible borrower. The idea of responsibility is to protect the interest of borrowers and make financial health of a borrower sound.

    Here are some of the time tested methods for becoming a responsible borrower:

    Your loan is not closed because you have paid all your EMIs: Ideally when you have paid all your EMIs, your loan should be closed. But there is a possibility that your bank has not updated status of your loan as closed even if the outstanding amount is zero. So after repaying entire loan, ask the bank or financial institution to issue a letter stating that your loan is paid. This will protect you against a future dispute with the bank.

    Check your credit report after closure of a loan: Once you have paid your loan, it makes sense to check the status of your loan in the credit bureau. There are many issue of data update with respect to closed loans. Typically three months after your loan is paid, it makes sense to ask for a credit report from the credit bureau to check what the status of loan in the credit report is. If you find any discrepancy, raise this issue with bank. This may potentially impact your credit score and future borrowings.

    Not using your credit card, close your card account: It does not make sense to hold multiple credit cards for the sake of it. It is better to hold one or two credit card. Many risks associated with multiple cards get reduced automatically. While closing your card account, ensure that the card account is closed and obtain a letter from the issuer of the card in this regard.

    Date of deposit of a cheque is not date of payment: Many people deposit cheque on the last date of payment and assume that the payment has been made. Please remember that the payment is done only when the bank has realized the money i.e. cheque has been honoured. In order to do so, deposit cheque in advance so that the bank or financial institution receives money in advance i.e. on or before payment day.

    Never be a guarantor of a loan, unless you the person very well: When you become guarantor of a loan for somebody, you become the borrower as well. In event of default of the loan by the borrower, the bank will ask you to pay the loan. If you don’t pay loan, this will become part of your credit history and borrowing money in future will become extremely difficult for you. So you should never be a guarantor of a loan for somebody you don’t know well and cannot trust completely.

    Avoid borrowing for consumption: Companies borrow money for growth. Leveraging a tool used by them to add value for shareholders. Same approach should be followed by individual borrowers also. One should avoid borrowing for consumption. Borrowing for consumption may cultivate a habit of borrowing irresponsibly. Also you may buy assets which depreciate very fast and have nominal residual value.

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