Ideally, you should try to make sure that you will never be in a financial situation where you would have to resort to borrowing money. That doesn’t mean, however, that it’s wrong to get a loan when it’s needed. After all, we don’t really know what happens in the future, and sometimes these unexpected events will demand cash that we don’t have at the moment. Emergencies, unplanned purchases, and sudden expenditures are all but some of the most common reasons for taking out a loan.
But how is it that so many people opt to take out loans but only some are able to get out of debt safely? These transactions can be very tricky, but if you’re responsible enough and you’ve got a legitimate reason to borrow money, the loan will help you immensely.
So here are some specific situations when borrowing money can be a good choice.
When You Know You Can Pay the Money Back
Now, this seems a little too obvious right now, but people who get desperate and want to get a loan don’t ever think about this. If you’re borrowing money from a bank, financial institution, or anyone for that matter, you have to know how exactly you’re going to pay the money back. This means:
- Knowing how much you’ll have to pay when the loan is due, including costs and interests;
- Knowing where this amount will come from; and
- Knowing when the total amount will be available and whether it will be available by the deadline.
Loaning is about getting money that you don’t have yet. If you’re not going to have money in the future, then maybe you shouldn’t be considering the loan in the first place. Creating an additional financial burden out of nothing will only force you into even more financial stress: you’ll be borrowing from other lenders, getting extra jobs, and be forced to keep up with interest. That really defeats the purpose of why you’re getting a loan to begin with – to eliminate financial stress.
When You Really Need the Something
By “need” we mean essential. The loan has to be something you absolutely can’t be without right now, like emergency medical expenses, repairs to your only means of transportation to work, or your rent. If you need money because you need to buy a loved one a birthday present or you’ll miss that trip that your friends are going on, then it’s not something you probably don’t need. Yes, these things appear important, and maybe they are. But right now, these are things you don’t need.
This, of course, requires a lot of attitude adjustment. When you’re not running well financially, you will have to cut some costs and avoid parts of your lifestyle you can’t afford at the moment. Even if you know that you’ll have money later, it’s never good to take out a loan on something you can just put off when you already have the money because you never know what will happen in the future. In the end, only you can decide whether a cost is essential to you or not, which means that the choice of putting something off because you can’t afford it right now has to come from you.
When You Have a Good Credit Score
Having a really good credit history means having a score of more than 720. This will give you lower interest rates and some other perks with banks and lenders. You’re given these benefits because on record, you’re a good borrower. That is, you pay your loans back well. As a reward, loaning becomes more convenient and quite more affordable for you.
But more importantly, a good credit rating means that you’ve proven yourself to be a responsible loaner not only to these lenders but to yourself as well. If you’ve had a lot of good experiences with loan and know the ropes, then it can be a good choice for you.
When You’ll Get More than What You’ll Be Paying For
This one has a more business angle to it, but it also appeals to common sense. Loans will naturally have interests and fees attached to them that you have to account for as well. If you think you need a loan, then you first do the math and figure out if the costs are actually going to be worth it.
This choice has to be made when, for example, you consider taking money from your investments (i.e. business capital, stocks, assets, and even insurance etc.) instead of taking out a loan. And while sometimes it’s wise to treat loans as a last resort, there are situations where you’ll stand to lose a lot more if you make those other sacrifices instead.
If your investments give you 12% in annual returns, then it’s definitely not worth touching just to avoid a loan that has a 5% interest rate. This is especially true if these investments have been proven to be stable in the previous years. You’re avoiding loss, if not in fact making a profit, in the long run. But if you stand to lose more on an expense that you can’t pay off with a simple loan, then maybe you should have to do the opposite.
This dilemma can also apply to non-business transactions. For example, selling your car to pay off a small debt might not seem like a good idea if you need your car to work. The car itself can be considered an investment. But if there’s a huge family emergency and you know you can get by without the car for a while, and then maybe selling it now instead of getting the funding through loans is the better idea.
When You Know You Can Pay Soon
The rule of loaning is simple: the sooner you can pay the better. There’s hardly a good argument for extending the life of a loan. Borrowing money can be a great idea when you know that there’s money coming but you don’t have it right now. In this situation, you simply take the loan out and then immediately pay the money back when the money arrives. Just make sure that you’re taking into account all additional costs of the loan.
Loans can make or break a person’s financial standing. Always take every situation that calls for a loan with a grain of salt, and consider all the factors that are involved. If anything, consider these loans as a last resort, and consider them only when they fall under any of the situations above.