Being a personal finance writer, an aspiring financial planner, and an economist by training, you may believe that I’m completely against debt. For the most part you would be correct! However, I do recognize that there are times when the wisest thing to do is to borrow money.
Keep in mind, there aren’t that many circumstances that will be improved by borrowing. However, I can’t say that it doesn’t exist. Here are two prime cases where borrowing money may be best:
Not prepared for an emergency:
Some people are in horrible financial situations and need to borrow money in order to avoid a financial disaster! Consider someone who doesn’t have an emergency fund, or even a cushion in their bank account. When an emergency arises, they may be forced to borrow money to stay afloat. If their response is to go looking for emergency loans, you really can’t blame them.
We aren’t talking about someone who wants to borrow money to buy an iPad, but someone who is facing a true financial emergency!
Obviously, the goal should be to arrange your finances so you can handle most reasonable emergencies that come your way. But, many of us have put ourselves in a position where a loan is the only way out. At least until we can straighten out our finances!
There are actually some financial writers who will recommend that you don’t have an emergency fund, and instead depend completely on credit. The problem with that advice is that many people do not have great (or even good) credit scores. So they are stuck applying for those bad credit personal loans, or trying to find a way to discover loans with no credit check. If this is your emergency plan, I would suggest saving up at least 9 months of living expenses, instead!
But those people who are living from paycheck to paycheck and then get hit with a financial emergency, are usually left with no other option but to borrow money – and usually not at favorable rates! Although, finding ways to increase your income is an often overlooked option!
Refinancing/Consolidating current debt:
Also, if you are trying to get on your feet financially, it may make sense for you to consolidate your debt using a personal loan (especially if it is unsecured). If you are able to get a lower interest rate, then borrowing money to consolidate your debt may be the best thing you can do! However, this isn’t to be taken lightly – especially if we are talking about credit cards!
Too many people will use a balance transfer option or even a personal loan to consolidate credit card debt, and then go back out within a year and charge up those same credit cards! Before thinking that refinancing or consolidating your debt is the answer, make sure that you have corrected whatever warped thinking, or unhealthy circumstances that lead to your current condition!
So, basically I believe that if you are in dire straights and an emergency arises, then you may have to borrow money. Also, if you are in a position where you can save money on interest payments by consolidating or refinancing your debt, then borrowing may be a good option for you as well.
In spite of all of this, borrowing money still puts you in the position of a servant to the one who has lent to you (Proverbs 22:7)!
Besides buying assets, what are some situations where you feel it’s ok to borrow?
Have you ever had to take out a personal loan?
Do you believe that a person should just use credit as a replacement to an emergency fund?
photo by Omar Omar