by Simon Wright

Created on: October 17, 2007   Last Updated: October 31, 2008

The phrase 'neither a borrower nor a lender be' originated from Shakespeare's famous play, Hamlet. The full quotation, spoken by Lord Polonius, is:

'Neither a borrower nor a lender be;
For loan oft loses both itself and friend,
And borrowing dulls the edge of husbandry.'

It is important to note that it was written in 1603, and we now live in a very different world. So whilst the general principle it espouses still holds relevance, it is important that we don't take it too literally. After all, a mortgage is a form of borrowing; yet without one you are unlikely ever to be able to afford to buy your own home.

So what are the pros and cons of both borrowing and lending, and should we indulge in them?

BORROWING:

Put simply, borrowing is where you obtain money from a third party (a lender) and commit to pay it back over a period of time. In addition, the borrower pays interest on top of the capital amount they borrowed. This interest forms the profit for the lender and the motivation to lend.

People tend to borrow these days from banks, building societies, and other financial institutions. However, person-to-person borrowing does still sometimes happen e.g. borrowing money from a loved one.

Examples of modern day forms of borrowing include:

- Personal loan. Typically used for amounts between 1,000 and 25,000 (c. $2,000 - $50,000) and to purchase a car, or home improvements, or to consolidate other debt.
- Mortgage. Used to purchase a property. Is a secured loan, which means that your house is used as security on the loan. If you fail to meet payments, your house will be repossessed.
- Credit card. Gives you the ability to buy now, pay back later.
- Overdraft. A borrowing facility which comes with a current/checking account, and enables to go into a negative balance as long as you stay within your agreed limit.

There are also a range of business and corporate loans.

The advantages of borrowing are fairly obvious:
- They allow you to spend money that you don't currently have.
- They enable you to buy a home, without having to wait 20 years to save the full purchase price!
- They give you flexibility in dealing with temporary fluctuations in cash flow.

However, the disadvantages are also familiar:
- Costly. Interest rates, especially on credit cards and overdrafts, can be very high.
- Can lead to a spiral of debt where all a person's monthly paycheck goes into servicing the interest that they are paying on their accumulated debt
- Can lead to loss of home, in a worst case scenario, if a

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