Borrowing money is sometimes necessary. While most people would love to be able to pay for whatever they wanted with cash, that’s often simply not possible. However, even for people who can afford to, doing so is not always, financially, the wisest thing to do. In this article, we will discuss when it’s a good time to borrow and when it’s not.
When to Borrow
When You Can Afford The Payments: Only borrow money that you can afford to comfortably pay back. If you have to worry about how you’re going to come up with the money to make your payments each month, forgo borrowing it. It will likely be more stress than its worth.
When It Doesn’t Make Sense to Deplete Your Cash Stores: It’s not always good to purchase big ticket items in cash. For instance, if doing so will completely wipe out your checking and/or savings accounts. Instead, it may make better financial sense to borrow the money and make monthly, installment payments.
When It’s Something You Need & You Can’t Afford To Pay In Full: Borrowing money to buy a house or a car makes sense. These are often items that most people can’t afford to purchase with cash and in full but which they need.
When the Rates and Terms Are Right: When the rates and terms are reasonable and the item to be purchased with the loan is a necessity, borrowing money to purchase it may be a good idea.
When Not to Borrow
When You Don’t Have The Money To Repay It: Simply put, if you can’t afford to repay what you borrow, don’t borrow it, even if a lender is willing to give you the money. Late pays and defaults will likely be the result with subsequent late fees, negative entries on your credit report and perhaps law suits.
When It’s For Something That You Don’t Need: Now, there are some exceptions to this rule. There may be something that you purchase with a loan because you want it and not necessarily because you need it. This, however, can start to become risky financially and may end up being detrimental to your finances. When at all possible, save up for your wants and only use credit or a loan to purchase those things that you need but can’t afford to purchase with cash.
When the interest rate and term are bad: Avoid, whenever possible, taking out a loan with a high interest rate and bad terms. It’ll end up costing you a lot of money and likely a great deal of frustration and worry in the end.
Knowing when to borrow money and when not to, is incredibly important. Knowing the difference will help you make smart financial decisions. Needlessly borrowing money for luxury items and non-essentials is unwise and will often eventually become financially burdensome. Instead, individuals should borrow cautiously and mostly for those things that they really need but can’t afford to pay cash for or for purchases that would deplete their banking account(s) if they were to pay for them in full.