plonkee money

September 28, 2009

when is taking on debt sensible?

Filed under: Uncategorized — plonkee @ 9:17 am

In principle, I don’t take out loans. I have a couple of credit cards, which I use sometimes and pay off  in full (although I try not to use them, because it’s not unknown for me to forget to make a payment). When I was a student, I had a £1200 overdraft which was interest free, and so I spent as long as possible paying it off – whioh is what I’m doing with my very cheap student loans. I also have had a mortgage out for the last two years. But actual personal loans, I’ve never considered.

I’m not claiming to be really financially savvy, self-restrained or aware. I just can’t think of a good reason to take out a loan. However, that doesn’t necessarily mean that I’m right. Kevin, a commentator at Get Rich Slowly said:

Furthermore, “financing” something just means you’re paying more for it than you have to. However, if that difference lets you enjoy it sooner, then the real question is, “how much would you pay to have that item/experience now, rather than later?”…

…phrasing it in the proper context like that serves to highlight the real, underlying value judgement being made, rather than simply adhering to some blanket “never finance anything” dogma.

Objectively speaking, I think this is true. Taking out a loan just means paying a premium to have the item or experience now, rather than in 6 months, or a year, or however long it would take to save up the money (or pay off the loan).

Of course, there’s always the likely possibility – if you don’t think you can save up for it, then why should you think you’ll be able to pay more for it later? Also, taking out a loan for some purchase means that you are also carrying extra risk – there’s the possibility that your income will decrease and you’ll be unable to make the loan payments.

But maybe there’s a case that sometimes it’s worth taking out a loan?

If I had an emergency that extended past the reach of my savings then I would take on debt if I could, because there is little other choice. When I am into my retirement, I shall probably consider a reverse mortgage against my house, because I don’t feel any need to pass on an inheritance.

Are there other circumstances in which it’s sensible, or at least acceptable, to take on debt? I can see how it might be more true as you get older. Everyone’s lifetime is finite, but the older you get the more important that fact becomes. It might be worth taking on debt to enjoy an experience that you might not be able to participate in fully if you left it until you had saved up.

What do you think about taking on consumer debt? Let me know in the comments.

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