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Should I borrow for this? Good Debt vs Bad Debt

We have all heard that debt is bad, but realistically almost everyone has to have debt. Not many people can really afford to pay cash for a home or a car.  Knowing the difference between good debt and bad debt is a key to financial success. 
What are the factors that might make getting a loan a smart financial move?
First is the reason for the debt. If you are using debt to buy a long term asset like a house, make an improvement to your house or for a need such as transportation then the debt is a smart financial move.  Waiting until you have saved enough for these purchases might mean that you have missed another financial opportunity such as tax savings.
What makes these types of debts a good choice?
They are all examples of good debt because of the value they generate.  The house allows you to eventually have an asset that is valuable versus renting.  Improvements to your home usually increase the value of your home. Having a reliable car allows you to get to work to earn a living.  All have long term benefits that usually can last longer than the repayment time for the debt.
What else could make a good reason for debt?
One decision that has to be considered is if your debt is less costly than the return you are getting on your savings.  If you are earning 8 percent on your savings and can get an effective loan rate of 6 percent, it would be wiser to borrow and leave your savings intact.  You savings is paying for the loan interest rate.
Are there any other good reasons to borrow?
If you have a child going to college and you haven’t saved enough for their college education using parent loans, student loans or a home equity loans are good options to pay for school.  You would never want to use retirement savings to pay for college. The potential impact to your retirement could be devastating.
What are poor reasons for incurring debt?
Any debt that doesn’t build value or provide a needed benefit is likely a poor debt. Two of the most prevalent are vacations and holiday shopping. These are especially troublesome if a credit card or multiple credit cards are used to fund these two activities.
Why can these be so harmful?
Both of these activities lead to paying for a short term enjoyment for a long period of time, perhaps even three to four years.  And since credit is being used, people tend to overspend creating an even worse financial situation that can be difficult to overcome if multiple years of vacations and holidays are put on credit cards.
What is another bad debt to incur?
The one that can spiral out of control the quickest is using credit cards and other loans to fund monthly expenses.  Living beyond your means by using debt to fund those activities is always a poor financial choice. It can happen very quickly too, first is just for the concert tickets and before you know it, your entire weekend entertainment goes on the credit card that will take you 5 years to pay off.

Posted: 7/30/2015 with 0 comments

Categories: Credit, Financial, Money Matters

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