5 times going into debt can be a good thing
Debt can place you on the fast track to financial insecurity; however, there are times when debt can be necessary and useful. Most debt is expensive and potentially fatal to your financial future ( looking at you, credit cards). Still, there are times when going into debt enables you to attain financial goals that you would otherwise be unable to reach. For instance, taking on debt to pay for college, lowering the interest rate on existing debt, or purchasing a home can make a lot of financial sense. Here are situations when going into debt is okay.
Debt can be okay when financing an education
Following the College Board, it can cost $24,0000 to attend a moderate state school and $48,000 to school in a moderate private school. Some students families’ can chip in toward educational expenses, like fees, tuition and room, and board. Ideally, you would not need loans at all to go to college. Your parents would spend your childhood saving money for college and supplementing that with scholarships, so you would leave school debt-free. And maybe you will do that.
However, a lot of colleges’ financial burden still rests on the student, and that often makes it essential to take out student loans. Following the Experian report, seven out of ten graduates in 2014 entered the working market saddled with a standard student loan burden of $28,950. That is undeniably a vast and problematic number; however, the college remains a robust investment, despite its high costs. Following the Bureau of Labor Statistics data, a person with a bachelor’s degree earns a median sixty-seven more weekly than someone with a high school diploma.
And if you are coming up short and you have the expertise and dedication to succeed, student loans do not have to be evil. The key to avoiding becoming a statistic- you know, joining those holding $1.48 trillion in student loan debt- is to prevent unnecessary student loans. Typically the income advantage offered by post-secondary education makes student loans one of the few kinds of debt that can be productive for the debtor over time. Besides, interest in federal student loans is comparatively low, and frequently, that interest can be debited on your taxes. Student loans are among the most flexible kinds of debt, too. Payments can be renegotiated depending on your income, or they can be temporarily stopped during financial emergencies, like job loss. There are even some cases that enable student loans to be forgiven, like working in certain public-service occupations.
When you take out a mortgage?
One of the best reasons you may get in debt is to buy a home. After all, the current median sale price for a United States home was $244,100, and not many individuals have that kind of ready money accessible. If you have the money, by all means, pay for the house in cash. If you do not have that type of spare money, you are like most homebuyers, who have to take out a mortgage to pay for the bulk of their purchase.
Securing a mortgage has long been essential for most people to be able to buy a roof over their heads. Though it is not a simple matter, the more you become informed about mortgages, the more you can save- spending less on interest and maybe even being able to buy a bigger or better home. Besides, the scary mortgage can be an investment. Buying a house is not like paying for furniture, a vacation, or a car- it typically appreciates in value instead of depreciating. Thus over time, real estate will be worth more money than what you paid for it ( possibly- all investments come with the threat, you know).
For starters, know that the higher your credit score, the better the interest rates you will be offered, and therefore, the less interest you will have to pay in the long run. According to MyFICO.com, a top credit score between 760 and 850 can get you an average rate of 3.11% for a thirty-year fixed-rate loan whereas a much lower score between 620 and 639; a person would get you 4.70 percent. Explore your credit score before house-hunting and spend some time improving it, if need be.
The type of mortgage you obtain matters, too. If you can sway the higher payments of a fifteen-year loan, you will pay less in interest and will own your home sooner. If not, perhaps get a thirty-year loan with no prepayment penalty, and aim to make some additional payments if you are able. If you are aware you will not be in the home long, an adjustable-rate mortgage can get you a lower interest rate. If you can stay for decades, a fixed rate can be smarter, particularly in our current low-interest-rate environment.
When you start a business?
If you want to generate money, you need to have money. Venturing in your business often needs upfront capital to get operations going. However, if you do not have a stash of money to fund your venture, your business could crash before it has a chance to succeed. And if you decide to empty your savings or utilize credit cards to fund your business, you can end up in more debt than if you took out a small business loan with a relatively lower interest rate. The United States Business Administration has a plan to help business people get financing once they depict success for a few years. Then, if your business does not pay back the debt, the government will pay the creditor. If you are still uncertain about loans to begin your business, contemplate using multiple funding sources.
When you need medical care?
Many people have ways to save on medical costs and figure out what to do if they can not afford medical bills. But in the end, this is a question of your health. If you do not pay for medically vital treatment since you can’t afford it now, you will likely end up paying more for expensive treatment later- or worse. Unlike your credit card company or mortgage lender, your doctor or hospital almost certainly does not often report missed medical payments to the credit reporting agencies. That indicates that not unless your medical debt becomes delinquent, it will not affect your credit score.
During an emergency, it can be challenging to make a financially savvy choice; however, if at all possible, avoid the mistakes when it comes to tackling medical debt:
- Taking money from your retirement plan
- Consolidating your medical bills
- Paying your bill with a credit card ( particularly a medical credit card)
If you can negotiate prices or request for financial assistance programs instead, you will be able to recover from a medical debt faster and with less financial stress.
Replacing bad debt with good
Another reason it can be okay to go into debt is if you borrow against new sources of credit to consolidate other loans and get more favorable terms. For example, if you have a lot of high-interest debt in the form of outstanding balances on credit cards, the one alternative you may have is to take out a home equity loan to pay off the credit cards. There is a disadvantage involved in that putting your home up as collateral introduces new risk; however, the much lower interest rates you can usually get compensate for that risk. Another alternative involves making excessive use of credit card introductory offers that offer zero-percent interest for a limited time.
Nonetheless, there is a caveat with debt consolidation. The debt only works if you have the discipline not to get yourself back into trouble with high-interest debt. Frequently, people consolidate credit card balances into one loan, only to run their card balances back up again. If you are not strong to avoid getting yourself into even worse debt trouble, then debt consolidation is not a good idea. But if you can cut up your cards and pretend they do not exist, the interest savings makes using new debt at low-interest rates to pay off high-rate debt a smart move to consider.
Note that this post is not a free pass for getting into debt. Remember, anything you put on a credit card is going to have repercussions in an interest rate that will leave you making payment for an impulse purchase long after you forgot why you had to have it. However, if you utilize debt in a way that allows you to grow your money in the long term, a dip into debt can be worth the trouble.