Pages Navigation Menu

Everything Personal Finance

Reasons To Borrow Money: The Good, The Bad and The Ugly

Image Source

Borrowing money is easier than ever before. However, just because it’s easier to do doesn’t mean that you should borrow money at every given instance. Not only does borrowing money cause you to pay extra in the long run due to interest charges, it can also negatively affect your credit score, limiting what you can spend money on in the future. That said, there are some instances when taking out a loan or using a credit card is a sensible solution and the debt is worth the investment. Here are some good reasons, some bad reasons and some ugly reasons to borrow money.

THE GOOD:

When it’s an unforeseen emergency that you’re not insured for

Insurance can help to pay for many emergencies in life, but there may be some instances when you don’t have insurance, in which case a loan is the next best option. Such an emergency could include medical treatment, home repairs, vehicle repairs or funeral bills. You may want to steer clear of general emergency loans and focus on more specialised loans that often have lower interest rates. There are even medical loans and funeral loans out there with no interest at all.

When you want to start a business

It costs a lot to start a business. Startup finance can help you to get your business off the ground by helping you to afford equipment and licensing. You’re best searching for specialist business loans rather than considering general personal loans as business loans often have lower interest rates. Borrowing isn’t only form of funding a startup – you may be able to save up the money or seek help from investors, although both options of funding are more difficult.

When you want to buy your first home

Real estate is so expensive nowadays that few people can get on the property ladder without taking out some kind of loan. It’s not an ideal debt to have, but it can prevent you settling for a life of rent as well as giving you somewhere to rent and make your own. There are so many ways to save costs of mortgage interests, which you should look into – don’t just settle for the mortgage with the cheapest down payment.

When you’re making home improvements

It’s also worth borrowing money when improving your home. A new bathroom or loft conversion could add extra value to your home making it a worthy investment. You can borrow money for home improvements through your mortgage lender or by taking out a home improvement loan – shop around to find the best deal.

When it avoids you getting in arrears

Some debts are better to have than others. Late payments to your bill provider or landlord could damage your relationship with these creditors and potentially result in services being cut off or a landlord not wanting to renew a tenancy – taking out a loan to pay these creditors could be more sensible.

THE BAD:

When you’re funding a gambling habit

When it comes to the worst reasons to take out a loan, funding a gambling habit is the worst. Borrowed money isn’t your money, so you’re essentially gambling with someone else’s money. If your gamble doesn’t pay off, you’ve then got to pay off a loan that will continuously remind you of your financial loss. It’s the equivalent of borrowing money and flushing it down the drain. Yes, you may get lucky and win money – but is the risk really worth it?

When it’s to fund a holiday

A holiday is supposed to be a treat that you earn. You also remember it afterwards for the right reasons and not be regretting it every time you make a debt payment for months afterwards. The only time you may want to borrow money is if you’ve already paid part of the holiday and an emergency cost then comes up – if cancelling your holiday causes you to lose the money you’ve already spent, you may as well take out a loan to pay for the rest of the holiday so that it’s not money wasted.   

When it’s to fund new clothes

Borrowing money to go on a shopping spree is a definite no-no – your clothes will forever remind you of your debts. If you need an expensive dress or a suit for a special occasion, hiring it could be a cheaper and more sensible option.

THE UGLY:

When it’s to fund a car

Cars have practical benefits, but there are also times when they can be an unnecessary expense. You can buy many cheap second-hand cars without taking out a loan as well as part-exchanging vehicles at certain dealers. There’s also the option of leasing a vehicle. All in all, it depends on your income and whether you’re making enough to justify getting in debt over a car. If you earn a lot, there may be no reason why you can’t buy an expensive new car on loan – you’re unlikely to ever be able to save up for such a vehicle. However, if you’re barely scraping it by, taking out a loan to buy a shiny new car could be irresponsible – you’re better off buying or leasing a vehicle that’s within your means. After all, unlike property, most cars depreciate in value, so you won’t make back any money from selling.  

When it’s to fund a gift for someone

You can borrow money to pay for gifts – but it depends largely on the gift. When it comes to children’s toys at birthdays and Christmas, feel free to borrow money to get gifts, but don’t borrow money just so that you can afford the most expensive gifts available. Similarly, there are items such as engagement rings that are better off being saved for.

When you’re paying off other debts

Paying off other debts is another area in which the answer isn’t black and white. In most cases, paying off a debt with another debt isn’t sensible as it could simply add to your debts. However, there are times when you may be able to refinance a high interest loan with a low interest loan, saving you money in the future. You should take care with consolidation loans – whilst these loans can make your debt more manageable by paying off lots of loans with one big loan, the overall interest you’ll pay in the long run may be higher.