Most people think debt is bad. When it comes to using it, however, there are many people who pass up valuable opportunities because they’re scared to borrow money. The real question isn’t should I borrow money? It’s when is borrowing money a benefit and not a detriment?
It’s important to recognize the difference and for more people to understand it. Some loans are useless for years, some are lifechanging. The trick is knowing which is which before you sign your name.
What Numbers Actually Matter
It’s helpful to borrow when what you receive is worth more than what you’re paying. Seems simple, but most people never run those numbers.
For example, assume you could lease a new car or pay for a used one while your friend lets you borrow their reliable car for free. If public transportation adds two hours to your commute each day (that’s 10 hours/week – that’s practically a part-time job). If your lack of reliable car means that you cannot take that better job or pick up an extra shift, the cost of a loan feels minimal in face value of what you’re receiving. Unfortunately, this rationale is skewed when people do it for the same reason to get a new car when they don’t need one.
Interest rates come into play exponentially. $1,000 or $10,000 at 4% interest pales in comparison to $1,000 or $10,000 at 12% interest. At the lower level, you’re doing little to no work to pay someone back for access to cash from the future. At the higher level, you’re working for the lender for most of the repayments. This is why it’s crucial to take time to educate oneself on what matters. Many lenders give borrowers much better terms simply by understanding what helps their rates and then making those factors happen.
Finding a forbrukslån lav rente makes the difference between borrowing your way and borrowing wrong; when percentages are that far apart from the average loan, it’s worth taking the time to compare your options because over time, those few percentage points add up significantly.
When Waiting Costs More Than Borrowing
The biggest shock is when the cost of not borrowing exceeds the cost of borrowing. Many people think that paying in cash is always better.
Many home repairs fall into this family. If a roof starts leaking, it may only cost you a quarter or a third to repair right away. Allowing it to spread for six months until you’re ready may increase costs by five times due to structural damage. It isn’t irresponsible to take out a loan to fix it immediately – it’s preventing a greater expense.
It’s also true for certain types of business expansion. If you want to move forward with an initiative that would not only repay itself in time but also generate additional revenue, waiting a few years to see if you can save up means that you miss out because someone else will take that opportunity in your hopeful waiting.
The same is true for medical and dental work. If it’s too soon now but costs X then hold off on dental work only to rack up thousands because something had been impacted all along due to neglect. Unfortunately, we feel bad about borrowing for health reasons but for preventative measures and stop gaps, if avoiding borrowing means critical conditions develop down the road, sometimes it’s best.
Investment Borrowing vs. Consumption Borrowing
The main way in which borrowing does not work out for anyone is when people fail to distinguish between investment versus consumption.
Borrowing for consumption means that you’re going to get something that depreciates and maybe even disappears altogether. That vacation, that meal out at the fancy restaurant, that entertainment system. Yes, these provide enjoyment but are they generating returns? No. Are you paying interest in the future for something that at best is worth less than what you paid for it but realistically worthless when all is said and done? Yes.
Investment borrowing conveys an ability whereby borrowed income may represent something worthwhile, income-generating or worthwhile for increased revenue opportunities down the road. Education is one thing – and yet it’s vastly different based on the field and debt acquired. A modest loan for trade school that pays off double is okay; a hefty loan for bachelor-prepared debt with a low job outlook is not.
Sometimes it’s even a gray area – for home improvements, for example, it can be consumption valued if hypothetically it just makes your life easier than investment if it increases value significantly.
What Rates Are Available
Not everyone will pay the same amounts when borrowing money. Certain people will earn better rates where borrowing does work out as a helpful tool while others will find their repayments so strong that it becomes more cumbersome than it needs to be.
Credit histories make a huge difference because lenders rely on them to denote how risky someone will be. The better credit someone has means lower interest – and this difference means across the board anywhere from 8% to 10% from excellent credit loans versus bad credit loans. That’s how much distance exists between plausibly agreeable repayment options versus horrendous ones.
Stability of income plays a part as well; lenders want to see consistency which denotes that you can make these payments every month without fail. Someone who’s been at the same job for ten years likely gets better options than someone who changes jobs every few years even though they make the same salary due to their higher income opportunity stressors.
Debt-to-income ratios few pay attention to – but lenders do. They want to see existing payments compared against how much you make overall – and if you’ve got minimal debt already compared with your high salary, you’ll likely obtain better terms than someone already stretched thin with discretionary debt – even with both incomes being equal.
Emergency vs. Planning
There’s nothing worse than an emergency surrounding borrowing vs planning.
Emergency borrowing usually costs more and has worse terms because when your car breaks down, and you desperately need replacement cars without any leverage, you are at a fault place shopping around within a short timeframe online. You take what you can get. As such, financial counselors tell clients to have emergency funds so they don’t need loans because at this very worst time, they’re at a disadvantage.
Planning gives one more control where they can make things better as a result; defer increases like savings accounts and down payments increase unless there’s an unforeseen expense but sometimes, just knowing that you’ve at least had time to get everything set up saves people 30% less interest on loans than had they jumped into it before proactively thinking things through.
When Numbers Won’t Add Up
Some options never make sense even if you try and rationalize them otherwise – usually high-interest rates compounded with consumer goods.
Borrowing money today for something you could pay cash for tomorrow (but choosing not to) indicates that you’re paying nearly double – or even triple – what it’s worth as a tool – and that’s not a system in place.
Additionally, maintaining an unhealthy lifestyle you can’t afford begs that if your income doesn’t cover something without loans at all – then that’s your answer on spending. People get caught up in cycles where they’re always borrowing to cover previous borrowing and digging themselves deeper into holes instead of addressing why they borrowed in the first place.
Payday loans – and their high-cost solutions – never make sense either. Their effective interest rates skyrocket into a real high soap opera world that are incomprehensible – and there’s usually better options out there.
What Should Happen
The first thing anyone should do when considering borrowing money is honest math – what’s it genuinely going to cost me over the lifetime? What’s my return worth from that expenditure? Can I get there some other way?
Then it’s time-sensitive – is it truly time-sensitive? Or am I just being impatient? What are my options if I do versus if I don’t?
Finally, contingency plans – can I get by borrowing less and investing my money? Better terms if I wait?
Borrowing money isn’t necessarily good or bad – it’s a tool that’s helpful in some arrangements or becomes thorny in others. It all comes down to awareness of the numbers needed vs convenience. Most borrowers never bother to figure this out – they only borrow money when they want something assuming it’ll all turn out great. Even before application submission – if you put yourself ahead through forethought – you’re already winning.
