If you’ve spent more than 10 minutes reading about personal finance you know it’s a really bad idea to borrow money. Almost the first thing every book on personal finance preaches is “don’t borrow money”, “don’t get in debt,” “shun debt like the plague“ etc. and etc. And in most cases this is good advice. When you borrow money you’re really borrowing from a future you. You get to use the money now but it won’t seem like such a good idea several years from now when you’re still trying to repay it. Debt is basically a financial parasite that sucks money out of your future earnings leaving you with less to save or spend.
But the fact is that there are times when it’s okay to borrow money. Of course, you should have a plan for repaying it.
#1. When you can’t pay big medical bills
No matter how diligently you plan your finances a medical emergency can cause them to spiral out of control. The three credit bureaus recently changed the way they handle medical bills, as they now will give you up to 180 days to address them before they add them to your credit reports. If you simply can’t pay those medical bills and can’t work out some kind of a repayment plan with your healthcare provider then the 180 days would at least give you enough time to get a personal loan and pay them off. Of course, you would want to try to find a loan that has a low interest rate. Borrowing money might not be an optimal solution to those medical bills but it would be much better than seeing them go on your credit reports as unpaid. You’ll want to make the payments on that personal loan on time and in full because if you don’t your credit score will be seriously damaged.
#2. When you can’t afford your moving costs
Moving can be one of the most stressful events in your life. This is especially true when you consider the expenses associated with a move. In addition to paying a mover there will be issues having to do with boxes, storage, transportation and those little unexpected costs that always pop up. If you’re making an intrastate move and you total all the costs associated with it you can easily end up spending $1000 to $1100. And if you’re moving interstate the cost might be as high as $5000. If you take out a personal loan to cover your moving costs it will save you money versus putting them on a credit card. The reason for this is because a personal loan will have a much lower interest cost than your credit cards. Get out your most recent credit card statement, check the interest rate and you may find that it’s 15% or even higher. In comparison, you should be able to get a small personal loan that has a lower interest rate and simple interest – so that the interest is calculated only on the principal amount.
#3. When you’re saving money but carrying debt
If you’re carrying debt but trying to save money at the same time it’s a losing proposition. One website recently published a list of the 10 best savings accounts for 2015 and the best one offered an APR of 1.10%. Now compare that with what you’re paying on your credit card debts, which probably averages 15% or more. This suggests that a better solution would be to take out a personal loan and use the money to pay off those credit card debts. Then, at least for the time being, you should quit worrying about saving money and focus instead on paying off that personal loan. Get it paid off in a year or 18 months and you would then have a lot more money to stick away in a savings account or to invest.
#4. When you can’t pay a car repair bill
It’s tough to earn a living if you don’t have access to an automobile that you can rely on. If you‘ve had a car accident that wasn’t covered by your insurance or a major repair bill that you didn’t expect your access to reliable transportation could be seriously affected. If you’re your unable to work out an affordable repayment plan with the car repair shop then a better option could be to take out a personal loan to pay for the work. Again, this could be a much better option than putting the repair bill on a credit card because that loan should have a lower interest rate than your credit card. In addition, when you charge things on a credit card and can’t pay off the balance at the end of the month, you become the victim of compounding interest. This is where the credit card companies make the real money because you’re paying interest on interest. In comparison, most personal loans are based on simple interest, which is a much better deal.
#5. When you want to make home improvements but don’t have enough equity
How much equity do you have in your home? If you’re not familiar with equity it’s the difference between what your home is worth and what you owe on your mortgage. As an example of this, if your house were worth $100,000 but you owed only $80,000 on your mortgage, you would have $20,000 in equity. If this were the case you could take out a home equity loan or homeowner equity line of credit to finance the home improvements you would like to make. For example, you might want to update your kitchen, add outdoor features or replace your roof. Taking out a personal loan to finance these additions or renovations could be a good idea because they should add value to your home.
If you must use a credit care
If you find it necessary to put medical bills, an interstate move or a car repair bill on a credit card the critical thing is to not make just the minimum payment as this is where compounding interest will cost you big money … as explained in this video.
A tool for managing your finances
A personal loan when used for the right reasons that has a low interest rate and fair terms can actually be a great tool that can help you manage your personal finances. However, it’s important to think things through carefully and maybe even sit down with a lender to discus your options before taking out a personal loan. And it’s critical that you get a loan with payments you can afford and then make those payments on time every time.
