I grew up believing that all debt was bad. Until my early twenties, I never borrowed any money — even when I was in dire need. As a result, I missed out on so many opportunities to make life easier for myself.
I wouldn’t want you to make the same mistakes. It is important to make decisions from a place of knowledge, not fear. So let’s talk about debt. The pros, the cons, and how to borrow money. Stick around.
Is all debt bad?
Debt is a powerful tool that can be used to fund important investments, but it can also cause you financial trouble when used irresponsibly.
Not all debt is the same. Some forms of debt are considered 'good', while others are 'bad'. This doesn’t speak to their inherent nature but rather refers to the assets the borrowed money is used to acquire. I’ll break it down.
Good debt is used to finance investments that will increase in value over time or generate income, such as a home, or education. Bad debt is used to finance purchases of depreciating assets, such as a car. A lot of people encourage good debt due to its potential to bring you more money. However, you must be careful with all debt because mismanagement can lead to many financial problems.
When is it appropriate to borrow money?
Borrow money only when necessary. You’ll also need to go over your financial situation and determine if you have the means to pay back the debt. Also, borrowing money should align with your goals. If you're looking to improve your quality of life or invest in your future, borrowing money may be a wise decision.
Now, let's take a closer look at how to obtain and use debt responsibly.
The first step is to determine how much you can afford to borrow. Your lender will assess your creditworthiness to determine the amount of money they're willing to lend. However, it's important to do a personal assessment to determine how much you can afford to repay.
Next, consider the terms of the loan. A loan's interest rate, fees, and monthly payments will determine whether you can afford it. Read and understand the terms of the loan and ensure that it falls within your financial capabilities.
To successfully use debt to your advantage, it's also important to have a plan to repay it. Develop a budget that takes into account your income, expenses, and monthly loan payments.
Make sure that your cash flow can support your monthly repayments and that you have a contingency plan in place if something unexpected occurs.
Don’t forget to keep tabs on your credit score. It is a reflection of your creditworthiness, and a high score will make it easier to obtain future loans with favourable rates and terms.
Monitoring your credit score and credit report can also help you identify any errors or fraudulent activity on your account and take steps to correct them.
Lastly, consider working with a financial advisor or debt counsellor to help you manage your debt. A financial expert can provide advice on which loans to consider and which to avoid, develop a plan to repay your debt, and help you make wise financial decisions that align with your personal goals.
How to Borrow Money
Now that we’ve covered the different types of debt and how to be responsible when acquiring debt, let’s talk about the practical steps to follow when you want to take out a loan. Keep reading for tips on how to borrow money:
Determine how much money you need: Before applying for a loan, determine why you need the money and how much you need. You want to get an amount that can meet your needs. It shouldn’t be too small or too large. Do an in-depth analysis to determine how much you need, based on what you’re using the money for.
Check your credit score: Having a good credit score helps you get better loan terms and lower interest rates. Make sure to check your credit score and address any errors before applying for a loan.
Compare lenders: Shop around and compare lenders to find one that offers the best terms for your needs. Look for lenders with reasonable interest rates, low fees, and positive reviews from previous customers.
Read the terms and conditions: Carefully review the terms and conditions of the loan to understand the repayment schedule, interest rates, and any fees associated with the loan. Ensure you understand the penalties for late payments and any other consequences for defaulting on the loan.
Have a repayment plan: Before accepting the loan, create a repayment plan that outlines how you will pay off the debt. Make sure you can afford the monthly payments and that the loan fits into your overall financial plan.
By following these tips, you can borrow money responsibly and use it to achieve your financial goals.
So yes, not all debt is bad. You just need to understand the different types of debt, and how to use them to achieve your goals. When borrowing money, do your research. Evaluate your financial situation and what you need, understand the terms, have a plan to repay your loan, and keep tabs on your credit score. Proper use of debt can help you build wealth over time. However, be cautious and responsible before taking on any debt to avoid potential financial problems.