The Cost of Borrowing Money
Your neighbor just bought a shiny new automobile, and youre still driving around in your six-year-old clunker. Should you take out a loan to purchase a new one? Perhaps and perhaps not. Even if your credit makes you eligible for the cheapest loans for automobile purchase, you shouldnt automatically run out to purchase a new car. On the other hand, if you want to trade in your petrol-guzzling model for an electric car, a hybrid or simply a more efficient petrol or diesel-powered car, then taking out a loan may be well justified. Weighing the pros and cons is important whenever you are considering any purchase, but especially an expenditure that involves going into debt, even briefly.
Good Reasons to Borrow
â€œNeither a borrower, nor a lender be.â€ This quote usually represents wise council, but there is also the danger of being penny wise and pound foolish, and cause you to miss out on a great price for an item that you really want. For instance, youve had your eye on a designer purse for months, and then you discover that it has actually gone on sale. If you were within sight of having the cash on hand for the original price for instance, in a month or so borrowing so that you can take advantage of a bargain makes sense.
Borrowing under such circumstances also makes sense because youre only borrowing a set amount. Its not like youre running up your credit cards to make up chronic shortfalls in your salary which would be a bad reason to borrow. Taking out a short term loans also makes sense because you can pay it off and be done with it, rather than taking out a mortgage modification loan, which would require years to settle.
Likewise, if youre waiting for a big payoff, for instance, a settlement payment, or if youve just received a huge raise, borrowing in anticipation of a large increase in liquid funding can be a wise strategy. Similarly, if you have high-interest debt from several creditors, taking the cheapest loan you can qualify for to consolidate your debt into one lower-interest payment also makes sense. With such a consolidation loan, you will not only save money every month, your total payments will also be lower. In addition, you will gain the added bonus of knowing precisely how much you will need to pay each month, which can help you establish discipline with your budget.
Bad Reasons to Borrow
Borrowing to â€œkeep up with the Jonesesâ€ is never a good idea. Your salary might not match that of your neighbors. Even if you make precisely the same salary, you may have obligations your neighbors dont have. It could also be the case that your neighbors are living above their means, which is something that you definitely do NOT want to imitate.
Seeing something in a storefront and deciding that you simply must have it immediately is another bad reason to borrow. The phrase â€œact in haste, repent at leisureâ€ definitely applies to impulse purchases. That wildly expensive pair of shoes that goes with absolutely nothing else in your wardrobe and which ALWAYS raise blisters on your toes will hurt more than your feet your budget will take a serious hit as well.
If you have tapped out every other (legitimate) source of funds, borrowing more money is not the answer. Such dire circumstances should send a clear signal that its time to cut your spending. Put yourself on an austerity budget until your finances are more in line. Likewise, if your creditors are becoming insistent about receiving payments from you, you may need to seek help from a financial professional to dig yourself out of a rut.
An advertisement for a loan offered at an unbelievable low rate should send up red flags. The phrase â€œif it sounds too good to be true, it probably isâ€ definitely applies to impossibly cheap loans. Its almost certain that the fine print would reveal hidden fees and other unpleasant surprises that could jack your actual interest rate sky high. Even taking a loan at a reasonable rate, for instance, a consolidation loan, spells potential danger if you generate new debt to replace the debt youve gotten rid of.
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