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when is taking on debt sensible?
WSA adsense code -->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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I think for the most part that taking on consumer debt is dangerous path. Although great in some circumstances, most of us fail to use our credit properly and end up with a pile of debt.
I agree with the above comment… taking on debt can be dangerous.
I really think forward thinking (such as saving for unexpected financial outgoings) can help you to avoid debt.
Ultimately all debt is simply deferred payment for consumption today. “Good debt” would be money borrowed to buy an asset -e.g. a mortgage to buy a home, a loan to buy a car to get to work to earn even more money.
“Bad debt”, in my opinion is everything else - especially credit cards - effectively you can pay cash for your purchase today or you can pay the same amount plus 15% next year - only you won’t probably pay it all off by next year - so we will charge you another 15% the year after!
In some circumstances, the taking later than now may not work.. particularly in case of real estate where the rate of growth in value of property may be more than the interest on loan.
Actually I think it’s okay to make a blanket statement about consumer debt being “unacceptable”. If you can’t save for something now, then you probably can’t pay it off later. Counting on future earnings and bonuses is a risky path. Yes, sometimes it works out but the one time it doesn’t, you can be screwed.
As you get older, you have more time to save (in theory) so it actually makes even less sense to take on consumer debt for life experiences. Yes, time is more finite but if you don’t have smart saving habits by now, you’re probably in deep trouble.
I learned my saving lesson in my 20s. A girl I knew charged for a ‘once-in-a-lifetime’ trip to Hawaii (luxury all the way). By the time she finally paid it off, with interest, she was over 30 and hadn’t gone on a big vacation in years. In the same time period, I went to Europe (twice), Asia and Brazil, without accruing consumer debt. I travel less extravagantly in general. I did have some financial help for the Asia and Brazil trip but still had to save up for both trips as well as Europe.
oilandgarlic: I think debt can only be a life experience if you can manage it - i think taking on debt which is beyond your means is never a good idea - not a good life experience if you are paying for it for years on end!
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The trouble is we don’t have perfect information. If we knew perfectly well what we’d earn over our lifetime, and when that lifetime would end, we could more easily solve the equation of future wants sooner versus higher costs.
But in reality there are risks to every part of the equation (plus our caveman instinct to always prefer now to “the future”).
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If you read any book about rich people, they all have 1 thing in common. They DON’T take loans and avoid getting in debt. It is the way they think, that makes them more and more money and keep the rest of us wandering around, searching for every penny to pay our monthly fee to our bank. Very sad:(