3 Times When Borrowing Money Is the Smartest Move
by Christy Bieber | Oct. 7, 2019
Borrowing money is often seen as a bad thing, but is that always the case? Here are some situations when you should consider borrowing.
Most people think of going into debt as something to be avoided at all costs. After all, when you borrow money, you take on a big financial obligation and you have to devote some of your earnings to paying interest. But it's important to realize that debt can actually be a helpful tool if you use it correctly. In fact, there can be times when it's smarter to borrow than to not borrow.
1. When borrowing will save you money
Borrowing money is smart if getting a new loan can actually save you money. One common example of this is when you get a new personal loan to pay off high-interest credit card debt or payday loans. If you're paying 15% or more in interest and can get a new loan at 10% or less, you could save a considerable amount on the cost of repayment.
Sometimes car dealers are also willing to give you a better price on a vehicle if you finance it than if you pay for it in cash. In this situation, you could take out an auto loan and pay it off within a few months in order to score the best deal on the vehicle. Just make sure there's no prepayment penalties if you know you want to pay the loan off early.
2. When borrowing enables you to grow your net worth
Purchasing a new home, starting a business, buying an investment property, or furthering your education could all help to improve your net worth -- under the right circumstances.
Unfortunately, most people can't afford to pay for homes, investment properties, new businesses, college degrees, or advanced degrees in cash. In these particular circumstances, taking out student loans, a mortgage, or a business loan may make sense.
You do need to carefully research the potential return-on-investment, though. If you're borrowing for a degree, make sure that it will actually help you to find a better paying job so you can make enough to pay off the loan and still come out ahead. If you're buying a home or investment property, you need to know you can afford the payments and should try to avoid buying when the real estate market is in a bubble and property values are likely to fall. And if you're starting a business, you want a clear plan towards profitability.
3. When there's an opportunity cost if you don't borrow
You need to compare the cost of borrowing with the opportunity costs of not borrowing to decide if it's a smart move to take out a loan or not. Consider the interest rate for the loan you'd be taking out versus what returns your money could earn from safe investments. And if you get benefits from the loan, such as tax-deductible interest on student loans or a mortgage, this should factor into your calculations as well.
There may also be times when you could pay cash for something, but doing so would drain your reserves and make accomplishing other financial goals impossible. For example, if you could afford to buy a house in cash but you'd have to drain your 401(k) to do so, this would likely be a bad move.
Don't be afraid to borrow in every situation
As you can see, going into debt definitely makes sense under the right circumstances. You just need to be smart when evaluating whether you should take on a loan or not. If you make a careful assessment of the pros, cons, and opportunity costs associated both with borrowing and not borrowing, you can make the choice that's right for you.
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