In our consumer driven society, it’s extremely easy to borrow money. Whether you’re racking up credit card debt on clothing, obtaining a mortgage with a 5% down payment, buying furniture on layaway, or getting a car loan to purchase a new ride, there are always new opportunities to buy something using someone else’s money.
Money can be a touchy subject, especially for those who are struggling to get out of debt. But whatever your financial situation, there will likely be times when you need to borrow money. Whether you want to start a small business, your hot water tank burst, you want to purchase a home, or you’re facing a medical emergency, your priority is the same – to get cash while avoiding potentially ruinous debt. How do you know when it’s appropriate to borrow money and when getting a loan will cause financial trouble?
Only Borrow For Education If You Can Pay It Back
One of the biggest sources of modern debt – especially in the United States – is student loans. While going to college may have been a no-brainer when you could pay your debt off within a couple years of graduation, students these days are taking on 6 figure debts to obtain degrees that don’t guarantee a job. If you’re a high school grad wondering whether to go to college, ensure that the investment in tuition is worth your while. Otherwise, choose a cheaper college or choose a trade that doesn’t require taking on a loan that could cripple you financially for the next couple decades.
Borrow To Purchase Appreciating Assets
Purchasing a home in a strong real estate market with a healthy down payment and low interest rates is one of the most sound investments you can make in your lifetime. Taking out a secured, low interest loan to invest in a solid, established business can also be a legitimate reason to borrow money in the right circumstances.
However, one of the most common personal finance mistakes is to borrow money in order to buy depreciating assets. A depreciating asset is an asset whose capital value will go down over time. Common depreciating assets that people borrow money to buy include furniture, appliances, and cars. While you may be convinced that you “need” a new car, or “need” a new espresso machine, it’s always much cheaper to save up the money to make a purchase than it is to take out a loan and pay it back later.
Borrow To Make Sound, Blue Chip Investments
When interest rates are low, it can be worthwhile to take out loans in order to make blue chip investments. These are investments where the chances of appreciation are high and the chances of losing the entire investment are extremely low.
However, taking out loans for risky speculative investments – even when interest rates are low – is often a bad idea, especially if it could potentially put you in ruinous debt. If you are taking out a loan for a risky investment, ensure that you have a plan for repayment of the loan if the investment goes south.
Avoid Borrowing From Friends & Family Unless It’s An Emergency
If you’re facing a medical or financial emergency, turning to friends and family may be your only option. But it can also be tempting to turn to friends and family for a cash infusion when presented with a new business or investment opportunity.
As difficult as it may be to pass up a tempting investment opportunity, it’s often the right decision if your only way to borrow money is from friends or family. If you lose the money and don’t have a way to pay them back, your relationships may be soured forever. If you do borrow from family and friends, ensure that you only borrow an amount that you can pay back within a year or two if the business or investment should fail.
Borrow For Survival
If times are tough and you need immediate cash to pay the bills, your only option may be to find the borrowing option with the lowest interest available to you. If you’re faced with bills to pay but you can’t get a bank loan, don’t have friends and family who can loan you the cash, and your credit cards are maxed out, your last resort is to turn to payday loans.
If you need cash for survival, same day payday loans with no credit checks may be a short-term solution. But it’s important to remember that cash loans charge exorbitant interest rates and should be used only as a last resort to keep the lights on or to keep a roof over your head. Do not take out a payday loan unless you have exhausted every other potential avenue to borrow money.
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Written by Scott Webster, a part time blogger, who is currently writing on behalf of Poundaccess.com. Poundaccess.com is a short term cash loans specialist in the UK.