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Should I use debt for that?


One of the most difficult financial decisions is determining when to use debt and when savings would be more appropriate. This is usually followed by deciding what type of debt is most appropriate for each lending situation. Deciding to go into debt and the type of debt that you will use are extremely important decisions that can impact your financial future for a long time.
 
You often talk about getting out of debt, but are there times that we need to use debt?
Yes, unfortunately most of us need to balance debt and savings to help purchase the things we need in our life. The key is using debt for the right reasons and knowing how much debt you can handle.
 
What are good reasons to use a loan rather than savings?
Using debt to purchase an appreciating asset like a house, or to finance a purchase that will lower your monthly expenses in another area like a new heating or cooling system or for improvements that add value such as new windows are all good reasons to use debt instead of waiting to save for all of the expense.
 
What are purchases would you recommend to be purchased with savings?
The purchases that don’t necessarily add any financial value or solve any problems. Examples include:  holiday spending, vacations and luxury items which include boats, RVs, and off road vehicles. These all fall in the category of wants rather than true needs.
 
Should we always try to have money to put down even if financing purchases?
Yes, even if you are going to borrow for most of the purchase price, having saved some money to use in the purchase can give you better rates. It will also demonstrate to yourself the ability to pay for the loan going forward.  If you are not able to save anything for a down payment, it is highly unlikely that your budget can withstand a new loan.
 
What are some of the important criteria when deciding what type of loan to use for each situation?
The deciding factors are usually going to be the amount of loan, how quickly you can repay the loan and if there are any additional financial incentives for using a particular type of loan – for example tax benefits, rewards or other ways that can benefit you financially.
 
Is all credit card debt a bad financial move?
Most of the time, credit card debit is the most expensive debit and should be avoided. However, if you are disciplined and willing to pay more than the minimums, sometimes credit card debt is the easiest method to finance short term needs. For example, using credit cards to pay for new furniture knowing you will pay it off over 6 months can be a smart financial move.
 
How can we avoid getting into too much debt?
There are a few basic rules that can really help you gauge how much debt to accumulate. It is based on the payment amount compared to your net monthly income.  It is important to use appropriate repayment terms for the type debt. These general rules are good when planning for future debt.
 
What are good guidelines for the different types of debt?
Credit card payments shouldn’t be more than 5% of your net monthly income using a 24 month repayment term. Auto loan debt no more than 10% over a 72 month term and mortgage payments no more than 20% over a 30 year term.  All other debt shouldn’t exceed more than 5% of your net monthly income over a 48 month term.
 


Posted: 3/30/2017 with 0 comments

Categories: Buying a Car, Credit, Money Matters



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