6 Times When It’s Okay to Take a Loan
Whether it’s an unintended financial emergency or a necessary, major purchase, there are some situations when taking out a loan can’t be avoided. Read on to understand when a new loan is actually okay.
- When You Can Easily Afford the Payments
This might seem simple, but when people are distressed they will sometimes acquire loans with large payments they couldn’t probably afford to pay. Before you take out any loan, create a realistic budget that includes the payment. If you can’t afford it, you should probably reconsider the loan.
- When Your Purchase is Essential
Loans are never a good idea when you’re using them to finance a lifestyle that is beyond your means. If, however, you find yourself in a place where you absolutely must have something essential (no, a remodeled kitchen or a tropical vacation are not essentials), and you can’t afford it, a loan might be a good idea.
- When You Have Good Credit
If you have good credit, you will most likely be eligible for lower interest rates on your loans. This means that you will pay less over the life of the loan and that your individual payments will be lower than they would be if your credit were poorer. And having good credit is, in itself, an indicator that you’re probably capable of managing your debt effectively.
Having good credit makes loans a lot more affordable. But once again, make sure you can make those payments! Otherwise, you’ll ruin that solid credit score.
- When Interest Payments Are Less Than Your Investment Returns
Many investors think that they should use money from their investments to make major purchases before considering a loan. While this is sometimes true, it’s also possible that it’ll be better financially to leave your investments untouched and get a loan to cover the purchase instead.
- When You Can Pay it Off Early
Sometimes you know there’s money coming in, but you just don’t have it yet. If you need to make a major purchase before that money arrives, you can take out a loan and repay it as soon as the funds hit your bank account.
But if you’re taking this approach, be sure that your loan doesn’t have any prepayment penalties. This strategy can work well for people who get large bonus or commission checks on a quarterly or yearly basis, so long as you don’t overestimate your actual earnings.
- When You Qualify for a “Special” Loan
There are a lot of “special” loans on the market, most offered by different government programs for things such as home-buying, education, or energy-efficiency retrofitting. These loans typically offer very favorable repayment terms which often make them worthwhile.
What have you bought with money from a loan? Do you think that getting the loan was worth it?