Debt is available, and it wants you.
If you meet the criteria, you can get a home loan, credit card or personal loan. Need a new computer, fridge or car? Your friendly local car dealer can organise the finances for that, too. Are these lenders shying away from you? Go for a payday loan instead!
I’m not a huge fan of debt, as it puts you at the mercy of another entity. You owe them.
But debt can serve a purpose.
Just because debt is readily available, should you use it?
The following are opinions on the use of debt in general, and do not reflect your financial situation. Speak to a financial advisor if you need advice on managing personal debt.
Unless you are buying that old classic Shelby GT, doing it up, holding it for a few years and selling it at a profit, pretty much anything with a motor will lose value as soon as you buy it.
If you get a loan to buy a car, not only will you lose money on the physical car, you will pay more than the original loan amount through interest repayments. You are falling behind, twice.
If you can afford it, save to buy the car outright. Don’t borrow to buy something that loses value.
Holidays give you a chance to recharge, experience and explore.
Holidays give you memories.
Some would argue memories are all we’ve really got, so go out and grab them. But are memories worth interest repayments as well as the base price?
There is always a temptation to live a life of pleasure and experience. To throw the holiday on the credit card and worry about it later. But that could slow your financial progress by putting the dream gap year on a credit card?
Would you be better off choosing a shorter, cheaper trip, or perhaps working your way around the world to feed your travel bug (which would give you more experiences and perhaps increase your potential to earn more money when you return)?
It might be best to travel to places in your budget, or base your travels in a foreign location where you can work and save to fund your next expedition.
Especially when you are young, saddling yourself with holiday debt might damage your future finances for quite a few years.
“Just throw the groceries on the credit card.”
“The latest bills? Put them on the plastic too.”
Everyday expenses are generally small, but can be frequent, so this debt could quickly add up.
Everyday items are usually necessary for day-to-day living, so might it be hard to avoid using debt to purchase them.
The risk is that you cannot pay back the debt in a timely manner, so you end up paying more than the original purchase price because of interest (or worse, late fees and charges).
If you cannot afford to buy everyday items, using debt might be your only option. If this is the case, make sure you have a plan to pay the money back.
The ideal scenario is to budget first, so you know how much you will need for everyday expenses and don’t overspend in less important areas.
This is where debt starts to make more sense.
Because over time, property will generally increase in value.
You’d have to do your budgets and use mortgage repayment calculators, but you might find that property price growth goes part of the way to making up for the interest you will pay.
For those who want to own a house, debt is usually the only way to achieve it. In these instances, it is still wise to save as much as you can, borrow well within your means and speak to a financial advisor.
Using debt to service debt is borrowing to repay or consolidating higher interest debt into lower interest debt.
Personal loans will often charge less interest than credit cards – can you put all of your debt into a loan rather than multiple credit cards? Credit cards will periodically have interest free time periods on purchases and balance transfers, which could help in the short term too.
As long as you formulate a plan to pay off your consolidated debt, using better loan terms can turn out to be a good way to use debt.
But it will just be a bandaid. Make sure you overcome the issues that led to the debt in the first place.
With any investment, you may lose all of your money. That is the big risk. Borrowing money to invest in any investment does come with this risk.
Having said that, using debt to invest at least has the potential to offer you returns.
But be wary – to be a good investment, the return you achieve has t be greater than the interest repayments or you will be losing money.
Only borrow to invest with the support of strong financial advice from a professional who knows your situation and objectives.
How do you use debt in your life?
Do you avoid it or does it liberate you?How are you using debt? by Glenn Hamblen