In many cases, it is believed that a loan should be avoided. After all, if you take out a loan, you have to pay interest, which is an additional cost. You also invest future income in payments, which gives you less flexibility in the future.
But despite the common misconception that borrowing is always bad news, in reality there are times when getting a loan is good. Here are three of them.
1. When your loan improves your net worth
Sometimes you can borrow something that will actually make you richer in the long run.
One of the best examples is mortgage… The mortgage comes with a very affordable interest rate, and interest can even be deducted from taxes if you include it when you file your return. Plus, it allows you to buy a home so you can start building capital, stop spending money on rent, and hopefully benefit from the rise in property values.
Another good example is a business loan. If you can borrow money at a low rate to start a profitable business that will increase your income, this might be a smart decision.
You will want to consider the cost of borrowing versus the future value of the asset you are acquiring with the loan to decide if debt is good or bad for you.
2. When your loan makes debt repayment cheaper and easier
Let’s say, for example, you have credit card debt that currently charges 20% interest. If you could qualify for personal loan to repay credit cards with an interest rate of 9%, getting a new personal loan can cut your rate in half. And the effect can be even more dramatic if you take out a personal loan to pay off your payday loanswhich can sometimes have interest rates in excess of 400%.
If you can get a new loan at a lower rate than your current debt, refinancing can be a really smart financial move. And if you are using your new loan to pay off multiple debts, this level of debt consolidation can actually make it cheaper to pay off both. and easier, since you will only receive one monthly payment with a low interest rate.
3. When Your Loan Helps Increase Your Creditworthiness
Lenders love to see a mix of different types of credit on your credit report. This means that you will have a better result if you have loans with a fixed repayment schedule along with credit cards. Because of this, you can take a small car loan when you buy a car and just pay it back quickly, even if you could afford to pay for the car in cash. Or, you can take out a small, low-rate personal loan to finance your purchase and then focus on paying back as soon as possible.
There are even some specific types of personal loans that are solely designed to help you get a loan, for example: credit loansthat serve borrowers with bad credit who otherwise would not be able to obtain financing approval. These loans can help you improve your credit rating significantly, which can make it easier to get loans in the future.
As you can see, there are several reasons why borrowing can be a good thing. The big question is not “Are personal loans bad? “Or” Are there other types of loans bad? »Instead, ask yourself what you are doing with your debt. If you are using it as a tool to improve your situation, then that is good. But if you “If you borrow to finance a lifestyle that you cannot afford, you might think twice.
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