Borrowed Money

(caution: some concentration needed)

“Borrowed money” is somewhat of a misnomer. It should be called “rented money.” You have to return the money, but you have to pay for the use of it. The “rent” or fee for the use of the “capital” is called the “interest,” or “rate.” The amount you borrow is the “principal.” The person who lends you the money has great advantages in law and in practice.

In practice, “they” loan to many people and talk to other lenders. Lenders (collectively) have the law written governing loans. You, on the other hand, have, at most, some limited ability to discuss borrowing with other borrowers, but few borrowers are familiar with customary terms and conditions of loaning. You, borrowing infrequently, have to deal from a position of ignorance. It is important to understand the terms of a loan: such things as repayment dates, how interest is figured, and what happens in case of default (if you can’t make a payment). Some terms of a loan are a matter of law, such things as disclosure of terms and conditions, maximum interest, recording loans with the County court (so you can’t get loans from several lenders and they can’t be repaid), what happens if you default, details requiring spouse’s signature, and so on.

In some cases you will keep the money p for a certain length of time, and pay it back with interest p + i. Sometimes the interest is taken out of the money you borrow, p dollars minus i, and then you pay back p dollars. This inflates the amount of income the lender makes for the same interest rate. Commonly, however, you make a series of payments. In some cases you make a payment of p/n dollars at the end of each of n periods of length t, and pay the interest on the total amount you still owe along with each payment, giving a declining payment. Also it is relatively simple algebra to calculate uniform payments, so you pay the same amount each time. Sometimes you make payments for several periods, then have a “balloon payment,” which can be paid off, or refinanced.

It is best to borrow from a reputable institution or a person you can trust. An institution familiar with production agriculture will cut you some slack on weather and the like. A bank will not, unless they know farming. Most industries do not have the variability of weather, unstable markets, etc., as farming does.

The only other feasible choice is to borrow from family, if it is available. If you borrow from an individual who makes this a practice, they may be looking for a sucker. Such an individual will be looking to take your security.

When you borrow money you are, in effect, doing business with a psychopath. (More accurately, has many of the characteristics of dissociative identity disorder. See http://en.wikipedia.org/wiki/Dissocial_personality_disorder )

The lender is a psychopath as a matter of law. You have to pay on time no matter what your needs are. If you have an accident, even an “Act of God” as the law puts it, a pure accident, with no fault of your own, you must pay on time. If a family member has a life and death need for cash (say an operation) you have to come up with your payment anyway. Don’t get over extended! Insurance is a must in case the borrower dies, too, if you want heirs to retain the property. The heirs will often get only a fraction of what it is worth if it is lost.

If you have property beyond indebtedness you can manage, you can think of it as a pillow against the financial uncertainties of life – you can give up some of it for certain other, greater needs, but you cannot “give up” what is in borrowed capital.

In farming you can frequently add enough value to cattle to be able to borrow for immature animals and then sell them at maturity, or sell their offspring. Prices may go down, but value increases considerably. Machines are a little more risky, because they take several years to pay for, but you can do custom work to fill in for payments. Substantial buildings take still longer to pay for, and usually there aren’t any other income possibilities for them beyond the intended use. Pole sheds made from timber cut on the farm is a good bet if you need something but don’t want to invest heavily and pay additional taxes on a good building. Land will take twenty years or more, and paying for it depends on the general economic times and the prospects for the industry. Good land that you can get over and is clear, and adjacent land (so you don’t have to transport machines and cattle, and waste time in travel, and have common fence between you tracts) is important. Proper pens, fences, chutes and tools can be worked into as you need them.

Finally, it is a good business technique to maintain a certain level of indebtedness, even if you can pay it all back. The borrowed money, if it is properly invested can help you grow. “Properly invested” means that the enterprise is capable of paying the interest, paying back the principle anytime you decide to, and justifies your work and management. “Too much” borrowed means that the risk of a declining economy, accidents to key people, and other risks make it impossible to repay.




Historical note: In the past there were “on demand” loans, between persons, mostly. You paid interest and principal on schedule, but the lender could call it all back any time he wanted to, a great evil. This was a business of some persons who acquired extensive lands by it, and made the “Great Depression” of the 1930’s worse.