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taking on debt: do personal or market forces rule?

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Now is a great time not to be looking to take on more debt, because it’s harder (and more expensive) to come by, due to the credit crunch.

On the other hand, in your own personal circumstances, when is it a good time to take on debt? And should you take into account the external market?

taking on a mortgage

About 18 months ago, I put in an offer on a house. I had just received a windfall that meant that I had enough money for the deposit and fees. I had a good mortgage offer - a 2 year fixed rate deal at 5.48%. My personal life was stable, I had a good job, had plenty of experience of living on my own, and was ready to commit to living in this area for the next 5 years or so. Personally, it was a good time to buy.

On the other hand, if you’d asked me then what I thought was likely to happen to the housing market, I would have suggested that it was probably nearing a peak. I thought that interest rates were likely to go up, and I didn’t particularly think that this was a good time to buy, if you were looking that the market.

I bought anyway. I didn’t like where I was renting, I didn’t want the expense of moving and then moving again in a couple of years. I was slightly worried that I might fritter away the windfall. I wanted to live somewhere that made me happy. I wanted a place of my own to decorate.

Although I got an ok deal on the house, with the benefit of hindsight I probably spent about £5k more than I needed to - the market wasn’t moving as much as I thought. It took nearly 6 months for the purchase to complete. It was quite stressful, and although now I really, really like my little house I’m aware that there’s an excellent chance that it will fall into negative equity in the next year or two.

other debt

Taking on a mortgage isn’t the only debt that you might incur where your personal circumstances and market forces might not be in sync. Now might be an excellent time to return to study for you personally, but is it a good time to be leaving the job market? If you’re trying to change or upgrade your career, what will the market for that be like in a couple of years time?

There’s probably never a good time to take on consumer debt really, but what about buying a car. If you need or want to get one now, you’re likely to find that interest rates are higher than you might like.

Should you postpone purchase that require debt until market conditions are better? Or should you put your own needs and circumstances ahead?

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4 comments for “taking on debt: do personal or market forces rule?”

  1. Interesting question. I don’t think there’s any easy answer. Obviously personal conditions have to be the first thing taken into account, but on the other hand in certain favourable market conditions it might be worth stretching yourself to take advantage. But would I personally ever stretch myself financially in order to take on debt? Probably not, but there are those who will and who might really benefit in future. I prefer to hedge my bets a little rather than take risks.

    Posted by FruGal | August 8, 2008, 3:47 pm
  2. Great post! I think the operative word is NEED.Very few people truly NEED a new car or new house. If you need a new car it doesn’t mean that you need one that makes you go into debt or have significant payments. I think saving in advance is the best choice, but when expenses crop up and it isn’t an option to pay cash seperating need from want is the best way to go!

    Posted by Frugal Trenches | August 8, 2008, 6:50 pm
  3. When it comes to longterm investments like homes in which you intend to live for years, the best time is when YOU are financially ready. Period. In 1975, I was finally financially ready. I didn’t get a great deal on my home, but it was the perfect home for the single, childless woman I was then, near enough to my parents for them to be happy, and far enough away to give me a semblance of privacy. 33 years later, I still own that home though it is now an investment rental. I think it is more important to pay attention to your personal economic situation than that of the national economy for purchases that should last you for years.

    Posted by Grace | August 11, 2008, 4:31 am
  4. I am fast approaching the time to replace my car (which I’ve had for nearly 8 years and has almost 200,000 miles on it). It has started breaking down often and it has gotten to the point that it’s just not worth it to me to fix anymore.

    I plan on buying a car that will last me just as long, if not longer, and I am waiting as long as I can to buy a new one so that I can save like crazy.

    So I suppose I agree with Frugal Trenches. I NEED a new car. So the debt is worth it to me … and I am doing everything I can to make sure that I will take on as little as I can.

    Posted by Maggie | August 12, 2008, 6:52 pm

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