When Borrowing Money Makes Sense
A lot of the time, people think of borrowing money as a negative. In many cases, this is true. When you borrow money, if you don’t have a plan to pay it off in a timely manner, it can be very costly. Plus, borrowing more money than you can afford to repay isn’t just costly, but it can get you into serious trouble. Your credit rating will be hurt if you miss payments and creditors and collection agencies will bother you until you pay up.
However, that doesn’t mean that borrowing money is always a bad decision. There are many times when it makes sense to borrow money. The key is knowing when it is a good time and a good reason to borrow.
In general, it could be considered a good reason to borrow money if borrowing the money improves your financial situation now or in the future. Of course, even if you’re borrowing money for a good reason, you’ll need to be sure that you don’t borrow more than you can afford to repay and that you have a plan for eventually eliminating your debt. Otherwise, you could still end up in serious debt trouble.
Also, remember that the situations detailed below are general situations where it could be a good idea to borrow money. Whether or not taking on debt is a wise decision for you personally will depend on your financial situation and several other factors.
Buying a House
The majority of people need to borrow money to buy a home. Very few can save up the amount required to buy a home outright, especially in today’s world where housing prices have increased dramatically in many markets.
Borrowing money to buy a home makes sense for many reasons. The first is that, compared to many other types of borrowing, mortgages often tend to have lower interest rates. In addition, unlike borrowing to make other purchases, the value of your home will likely increase over time. Compare this to borrowing money to buy a car, for instance. If you buy a new car, the vehicle will decrease in value as soon as you drive it off the lot, while a home will probably at least hold its value, if not increase over time.
Another reason why borrowing money to purchase a home is often a good reason to borrow money is that you get to live in the home. There are always monthly costs associated with housing (such as rent) so borrowing and paying off a mortgage often makes sense because, once you’ve paid off the mortgage, you owe the home.
Financing an Education
If you’re borrowing money to go to school, or to send a family member (such as a child) to school, you’re doing so to gain a financial benefit in the future. Increased education often comes with increased earning potential, so investing in an education now will likely pay off in the long run. In addition, if you borrow money to pay for school, there is a better chance of you getting a job that you enjoy in the future, which will improve your entire life.
However, education costs can be very expensive, leading to people graduating from school with very large amounts of debt. If you borrow money, it’s always important to make sure you do not borrow too much and that you have a plan to pay it off.
Starting a Business
Starting a business, or expanding an existing business, can often be a good reason to borrow money. If you’ve done a thorough business plan and looked at the numbers carefully, borrowing money to start a business could result in a financial benefit down the road.
Of course, it’s important to be aware that if you borrow money and your business is not as successful as you hoped, you will still need to repay the money you borrowed, potentially in addition to any losses sustained by your business.
Paying off Debt at a Lower Interest Rate
Taking out a consolidation loan can be a good idea, depending on your circumstances. With a consolidation loan, the goal is to get a loan with a lower interest rate than the overall interest rates on your current debt.
In practice, however, this can be somewhat difficult to do. Lenders may not be willing to give you a favorable interest rate if you already have quite a lot of outstanding debt. It’s also important that you have a plan to stop taking on new debt once you get a consolidation loan. If you take out a new loan to pay down your existing debt, and then continue to add up debt on your credit cards (for example), you won’t be improving your financial situation, and you could end up making it worse.