Here is an amusing educational story that I received from the email. The writer asked to remain anonymous but was very open about sharing his experience to help others. We will call him Luis.
It is normal that people who are short of cash to approach relatives and friends who have some extra money. The borrowers will even offer good interest rates to entice the lender to agree. In fact, borrowers prefer to pay the interest to reduce whatever “utang na loob” the loan will cause. The Lender also becomes interested because he is able to help his relative or friend and make some money at the same time. There is definitely nothing wrong with this type of transaction.
When Luis got married, he and his wife had extra cash from gifts and savings. One day, his friend, Carlos was complaining about the 31% he had to pay for interest on a two-year car financing loan. Carlos was not really complaining about the rate but more on the charges that went with the loan like chattel mortgage, processing fee, post-dated checks etc.
Luis saw a great opportunity to earn. He asked Carlos if he really wanted to buy the car and if he really wanted to get a loan. Carlos replied positively. It’s just that he didn’t want to pay for all those extra charges. He didn’t think it was fair. Luis asked Carlos more questions to check if Carlos could really pay for the amortization of the loan. Luis was satisfied that Carlos could really pay. So, he offered Carlos a deal. He would lend Carlos P300,000 for two years for a 30% interest. The car would be registered in the name of Luis and would be covered with full insurance. Luis would not require detailed documentation and there were not extra charges.
Carlos was very happy. For the P300,000 at 30% for 24 months, Carlos gave Luis a monthly check of P16,250. Luis was also very happy. After all, where could he get a deal earning 15% per annum without any risk.
Carlos was a good debtor. He paid on time and Luis received P16,250 per month. In 24 months, Luis actually received a total of P390,000. Unfortunately, he spent the monthly P16,250 check each time he received it. He didn’t reinvest it again because it was a relatively small amount each time. At the end of the 24 months, Luis ended up with only the last P16,250 installment! Luis likes to laugh at himself when he tells the story. But he said that in truth, he really feels badly about the lost opportunity. He is much more prudent now. Luis values money much more, no matter how little of it there is. Today, P16,250 can be invested readily. In fact, even only P5,000 can already be invested.