When Does It Make Financial Sense To Borrow Money?

When Does It Make Financial Sense To Borrow Money?

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Have you ever struggled with the decision to make a big purchase? I certainly have. Not only can it feel daunting, but it can also feel conflicting, especially if it involves taking on debt. Although not all debt is bad, incurring it requires careful consideration of potential risks. Is it covering a want or a need? Are the repayment terms feasible? Is it worth the interest rate? These kinds of questions can help determine if and when it makes sense to borrow money.

Sensible Debt

It’s no secret that I’m not the keenest on borrowing money, but I am certainly no Dave Ramsey. I’m all about the (responsible) use of credit cards and smart leveraging. Debt can be a tool when used appropriately.

Career Advancement

Sometimes, one must spend money to make money. In this case, securing a loan for career advancement can be a strategic decision for personal and financial growth.

Whether one chooses to borrow money for a college degree, online courses, workshops, or professional certifications, it’s best to ensure they are wise investments that will truly be assets to future career prospects. This cannot be emphasized enough. It’s important that these opportunities facilitate the development and refinement of desirable skills.

Otherwise, taking on debt to aimlessly wander through continuing education is really just running up a costly tab.

Homeownership

Purchasing a home with cash is not a practical option for most people, particularly with the rising median home price nearing half a million. A mortgage bridges the gap between a down payment and the purchase price of the property.

Providing that the property is affordable, a home loan with a fixed interest rate can be an incredible tool for building wealth. It provides immediate housing, spreads the cost over the life of the loan, and builds equity with each payment.

Furthermore, real estate tends to increase in value over time. Appreciation is not a guarantee, so it’s recommended to review and consider the state of the housing market along with the overall purchase price plus additional costs such as maintenance, repairs, and taxes to determine the rate of return.

Investments

Borrowing money to fund lucrative investments can pay off in the long run. With careful risk assessment and trusted guidance, securing a loan to diversify an investment portfolio can help maximize potential returns, as opposed to solely using one’s own savings. Debt can be used to invest in the stock market, rental properties, fix-and-flip properties, and other assets.

Launching a Business

So, you saved up some seed money to kick-start your business, but is it enough? If you find yourself a bit short on start-up money, sometimes it makes sense to take out a reasonable small business loan. Provided you are in good financial standing, small business loans often offer competitive interest rates and flexible terms. They can be extremely valuable in helping a business establish itself, achieve its goals, and increase its profits.

Reliable Transportation

Owning a reliable vehicle can be the difference between earning a living and struggling to make ends meet. It’d be great if one could depend on reliable public transportation, but that isn’t always the case.

I once considered using my local transit system for my daily commute. Despite being 17 miles away from work, my commute would take over an hour each way. I thought I would be able to regain some sanity by using local transit, but it turned out that it would cost me almost two hours each way. Not only that, but the buses are often known to be delayed, and sometimes they don’t even show up. That’s not very reliable‚Ķ Thankfully, I owned a car and decided to stick it out until I was able to negotiate a remote position.

Not everyone has the ability or desire to work remotely. In these cases, especially when faced with unreliable public transportation, owning a reliable vehicle is ideal. Sometimes, it makes sense to finance a vehicle, particularly when it’s necessary for work. Though a car is considered a depreciating asset, the fact that it would help one secure a living could make it a worthwhile investment. The key is to ensure it’s a practical purchase. For example, would it really make sense to borrow money for an $80,000 luxury car? Or would a $4,000 beater get you from Point A to Point B just fine?

To Borrow or Not to Borrow?

While I personally prefer to save money rather than owe money, it’s not always possible or optimal to avoid debt. There’s a time and place for leveraging debt to help generate wealth and assets. Ultimately, the best indicator of whether it’s wise to borrow money is if the purchase will yield a quantifiable return.

Would the payoff be worth the risk? It’s a personal decision, one that requires careful thought and comparative analysis. For me, I believe that my mortgage was worth the risk, as it helped increase my net worth.

What is one purchase that you’ve borrowed money for that was ultimately worth it?

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2 Responses

  1. Regarding mortgages: Saving for a decent down payment is the best approach to getting that first home. Lenders are more inclined to consider those who have the discipline to save a portion of their income for a future benefit. It may actually lower the interest rate being offered. Home ownership may be a daunting prospect for many, however one must consider the fact that renting a home or an apartment has not been a financial winner these past few years.

    1. I agree! Not only will lenders be more inclined to issue a mortgage to those with a down payment, but saving for a down payment is also good practice for learning how to save for unexpected expenses (such as the ones that appear as a homeowner).

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