Common knowledge for new borrowers
The Old-Timer's Guide to Money
A glossary tells you what a word means. This page tells you why it matters, using the sayings, pictures and rules people have passed down for centuries.
Chance favors only the prepared mind.Louis Pasteur, Lecture at the University of Lille, December 7, 1854 (English wording varies by translation)Our motto
Dans les champs de l'observation, le hasard ne favorise que les esprits préparés. Preparation is the whole idea behind LoansFlow: know your numbers, your options and your paperwork before you borrow.
Old sayings, translated
“Cash is king.”
Having cash on hand beats having assets you cannot quickly sell. Businesses fail from running out of cash far more often than from lack of profit.
“Don't throw good money after bad.”
Do not keep funding something that is not working just because you have already spent a lot on it. Refinancing a failing venture rarely fixes it.
“Save for a rainy day.”
Keep a reserve. Lenders like to see months of operating expenses in the bank because it shows you can survive a slow stretch.
“Pay yourself first.”
Move savings aside before you spend the rest, instead of saving what is left. For owners, it means building the reserve and owner equity a lender wants to see.
“Measure twice, cut once.”
Check the numbers before you commit. Running a few scenarios in a calculator costs nothing; a bad loan costs years.
“Penny wise, pound foolish.”
Chasing a tiny saving while ignoring the big cost. A lower rate with a heavy prepayment penalty or origination fee can cost more overall.
“Never borrow short to lend long.”
A banking rule: do not fund a long-lived asset with money that comes due soon. For borrowers, match the loan term to how long the thing will last.
“You can't manage what you don't measure.”
Know your key numbers: monthly cash flow, debt payments, and coverage ratio, before you ask a lender for a dollar.
“If it sounds too good to be true, it probably is.”
Guaranteed approval, no credit check and upfront fees before funding are classic loan-scam signs. Real lenders disclose the rate, fees and terms in writing.
“Get it in writing.”
Verbal promises do not survive a change of loan officer. Rates, fees and conditions should be on the Loan Estimate or term sheet.
Pictures that make finance click
Rent on money
When you borrow, you are renting someone else's money. The interest rate is the rent, and the term is how long the lease runs. Rent is cheaper when the landlord trusts you will pay and pay on time.
Sticker price vs. out-the-door price
The interest rate is the sticker price. The APR is closer to the out-the-door price because it folds in certain fees. Compare APRs, then ask which fees are not included.
Walking down a staircase
Early payments are mostly interest, with only a little going toward the balance. Each step down shifts more of the payment toward principal until you reach the bottom: a zero balance.
The load rating on a bridge
A bridge rated for 10 tons is not driven by 10-ton trucks. Lenders want income about 1.25 times the loan payment so ordinary bumps do not cause a collapse.
A security deposit on an apartment
It is the thing the lender can keep if you cannot pay. The deposit lowers the landlord's risk, which is why secured loans usually cost less than unsecured ones.
Your reputation in a small town
Everyone has heard how you pay your bills. A strong reputation opens doors and gets better terms; a damaged one takes steady, visible effort to rebuild.
The wholesale price of money
Banks lend to their best customers near prime, then add a spread for everyone else. When prime moves, variable-rate loans move with it.
Locking in a price vs. paying at the pump
A fixed rate is like filling a tank at a price agreed in advance. A variable rate is paying whatever the pump says each month: cheaper if prices fall, painful if they spike.
The big bill at the end of dinner
Small payments along the way, then a large amount due all at once. Fine if you plan to sell or refinance first, risky if you are counting on luck.
A water tap, not a bucket
A term loan hands you a full bucket and charges you for all of it. A line of credit lets you open the tap when you need water and pay only for what runs through.
Rules of thumb
The Rule of 72
Divide 72 by an annual interest rate to estimate how many years it takes money to double. At 8%, about 9 years (72 ÷ 8). The same math shows how fast debt grows at a high rate.
The 28/36 guideline
Many mortgage lenders look for housing costs under about 28% of gross income and total debt payments under about 36%. Some loan types allow more, but it is a handy sanity check.
The 1.25 coverage rule
For business loans, many lenders want net operating income of at least 1.25 times the annual loan payments. Below that, expect more questions or a smaller loan.
The Five Cs of credit
Character (your track record), capacity (cash flow to repay), capital (your own money in the deal), collateral (what backs the loan) and conditions (the purpose and the economy). Every lender weighs these, formally or not.
Match the loan to the life of the asset
Pay for a laptop over 3 years, a truck over 5 to 7, a building over 20 or more. If the loan outlives the asset, you are paying for something you no longer have.
20% down avoids PMI
On most conventional mortgages, putting down at least 20% means you do not pay private mortgage insurance. With less down, expect PMI until you build enough equity.
The 50/30/20 budget
A popular starting point from Elizabeth Warren and Amelia Warren Tyagi's book All Your Worth (2005): about 50% of after-tax income to needs, 30% to wants, 20% to savings and debt repayment.
Build an emergency fund
Common guidance is three to six months of essential expenses in easy-to-reach cash, so one surprise does not turn into a high-interest loan.
Famous words about money and debt
Every quote below is labeled. Documented means we can point to a specific source. Commonly attributed means it is widely repeated but the credit is uncertain or disputed.
Chance favors only the prepared mind.Louis Pasteur, Lecture at the University of Lille, December 7, 1854Documented
Our motto. Borrowers who know their numbers, their options and their paperwork get better outcomes than those who hope for luck.
A rising tide lifts all the boats.John F. Kennedy, Remarks at the dedication of Greers Ferry Dam, Heber Springs, Arkansas, October 3, 1963Documented
The saying is older than Kennedy, but he made it famous. Access to fair credit helps whole communities, not just individual borrowers.
Neither a borrower nor a lender be; for loan oft loses both itself and friend.William Shakespeare, Hamlet, Act 1 Scene 3 (Polonius to Laertes)Documented
Worth remembering that Polonius is a windbag. Borrowing is often smart; the lesson is to borrow with open eyes and write down the terms, even with friends.
Beware of little expenses; a small leak will sink a great ship.Benjamin Franklin, Poor Richard's AlmanackDocumented
Small recurring fees add up. It is why lenders and borrowers should both read the fee line by line, not just the rate.
Rather go to bed supperless than rise in debt.Benjamin Franklin, Poor Richard / "The Way to Wealth" (1758)Documented
Franklin's hard line on debt. Modern lenders would say: debt for things that earn money or hold value can make sense; debt for everyday spending rarely does.
Creditors have better memories than debtors.Benjamin Franklin, Poor Richard / "The Way to Wealth" (1758)Documented
Which is why every loan has paperwork, due dates and a credit report behind it.
A fool and his money are soon parted.Thomas Tusser, Five Hundred Points of Good Husbandry (1573)Documented
One of the oldest money proverbs in English, and still a decent test before signing anything: did you shop around first?
It is the part of a wise man to keep himself today for tomorrow, and not venture all his eggs in one basket.Miguel de Cervantes, Don Quixote (1605), Shelton translationDocumented
The origin of "all your eggs in one basket." For a business, it means not relying on a single customer, supplier or lender.
Never spend your money before you have it.Thomas Jefferson, Letter to Thomas Jefferson Smith, February 21, 1825Documented
The plain-English version of "do not borrow against income you only hope to earn."
Penny wise and pound foolish.Robert Burton, The Anatomy of Melancholy (1621)Documented
Saving a little on the rate while ignoring fees, prepayment penalties or a bad term is exactly this mistake.
The first thing is character... before money or anything else. Money cannot buy it.J. P. Morgan, Testimony to the Pujo Committee, U.S. House of Representatives, 1912Documented
Asked whether credit is based on money or property, the banker said it is based on character. It is still the first of the "Five Cs" lenders use.
Price is what you pay. Value is what you get.Warren Buffett, Berkshire Hathaway shareholder letter (2008)Documented
Works for loans too: the cheapest rate is not the best deal if the terms, fees or flexibility are worse.
Be fearful when others are greedy, and be greedy only when others are fearful.Warren Buffett, New York Times op-ed, October 16, 2008Documented
On borrowing: rates and credit standards swing with the mood of the market. Plan for the tight times when credit is easy.
Someone's sitting in the shade today because someone planted a tree a long time ago.Warren Buffett, Widely quoted in interviews and profilesCommonly attributed
A fair description of what a long-term loan for a building or machine is supposed to be.
Compound interest is the eighth wonder of the world.Often credited to Albert Einstein, No reliable record that he said itCommonly attributed
Compounding is real and powerful, and it works against you on debt as much as for you on savings. The Einstein credit, though, is a myth.
The secret of sound investment is three words: margin of safety.Benjamin Graham (paraphrased), The Intelligent Investor (1949) develops the "margin of safety" ideaCommonly attributed
This is the same idea as a debt service coverage ratio. Lenders want income well above the payment so one bad month does not break the loan.
Myths, busted
Fact: There is no reliable record that he said it. The idea is true (compounding is powerful); the credit is not.
Fact: Checking your own report or score is a "soft" inquiry and does not hurt your score. Applications for new credit can create "hard" inquiries.
Fact: In the main programs, a bank or other lender makes the loan and the SBA guarantees part of it, which lowers the lender's risk. (Microloans are different: the SBA funds nonprofit intermediaries that lend.)
Fact: Fees, points, prepayment penalties and the term all change the total cost. Compare the APR and the total repaid, not just the headline rate.
Fact: It lowers the monthly payment but increases total interest. Our term loan example shows a 7-year loan costing about $19,000 more interest than a 5-year one on the same $150,000.
Fact: Pre-qualification is a quick estimate. Approval comes after the lender verifies your income, credit, assets and the property or collateral.
Want the definitions too? See the loan glossary. Ready to use what you learned? Pick a loan type.
Quotations are included for education and inspiration. They do not imply that any person or institution quoted endorses LoansFlow.