Amazing Kids! Magazine

When to Lend Something

By Ryan Traynor, Editor-in-Chief

 

The other day at school I overheard a conversation between two of my classmates. One boy asked another student if he could borrow $5 because he had left his lunch money at home. I listened as there was an exchange of conversation until finally money changed hands. It made me realize that every day we work through money negotiations, almost like we were banks. The one student needed to assess the probability of the boy’s repayment before he forked over the $5. There were a couple of things going against the boy: he was not responsible enough to remember his money in the first place so why would he remember to make the repayment, he did not have a job while he was going to school so the repayment would come from some party unknown to the other student, there was a time limit because the lunch crowd was beginning, so the student did not have much time to make his decision.

Our everyday lending decisions that may include loaning your bicycle to a friend to go to the store, borrowing a sweater because the weather was colder than you predicted, or needing an extra quarter because you underestimated the cost of your drink. We weigh various criteria before offering our things to other people. Banks call this making a credit analysis.

The credit analysis by a bank includes what is called “The 5 C’s of Credit.” These include:

Character – what loans have been repaid on time before, time on the job, how long they’ve lived at the same house or gone to the same school. The longer someone has been in one place, the more stable they are considered to be. If you know your friend repays loans first thing the next day and they have many instances where they have done this, they have good character.

Capacity – look at how much is owed versus how much they earn. If you know your friend gets a weekly allowance or some other income such as babysitting on a regular basis, then they have the capacity to repay the loan.

Capital – how much you own minus how much you owe. If your friend owes quite a few people money, then you’ll have to wait in line to get repaid. Knowing what other debts they have outstanding is a good predictor of whether they are good for the loan.

Collateral – anything of value that you can take if the loan is not repaid. Perhaps you’ll like to take someone’s ring or something else of value until they repay the loan. If they don’t repay, you get an agreement that you can keep the “collateral”. Another option is to get a guarantee. This means if one person can’t pay, another person guarantees that they will pay if the other one can’t. Many times this is the parents of the student, but it could be other friends. Just make sure the other person guaranteeing can make the payment as well.

Conditions – anything happening that might affect their financial situation or ability to repay – If summer is coming up and you know the boy has a summer job, that would be considered a good condition. However, if you know that the mall is not hiring this summer due to a bad economy, that information may be a bad condition that will affect their ability to repay.

These are fancy terms the banks use to determine whether to trust someone to repay the loan. Just remember the principles behind these terms so that you can add good judgement into that “gut feel” when you are lending something of value to someone else. Generosity is important, but gaining someone’s trust by following through with your promise is also important.