By Jeffrey Strain | MainStreet.com
Times are tough, but don’t blindly follow the “debt is bad” mantra.
People who haven’t worried about debt in years past are now finding it isn’t all that fun to carry it when the economy turns sour and housing prices drop. That said, not all debt is bad. As with most issues relating to personal finances, learning to avoid the extremes and figure out the best way to make debt work to your advantage should be a primary goal.
Here are six examples of how debt can be good for you:
Debt builds wealth. If you have a great idea for a company but you don’t have the money to start the business, you will either have to save it or borrow it. If the business becomes profitable, it often makes sense to borrow money to get started rather than wait for years to save it. If you have developed a quality business plan that realistically shows you can succeed, one of the best ways to make that happen is to get a loan.
Debt helps your credit score. It’s one of those ironic aspects of finances: To get a good credit score, you have to first take on some debt, or else be viewed as a poor credit risk. This is one of the reasons you really do need a credit card (as long as you use it responsibly). A higher credit score sometimes translates into lower interest rates.
Debt makes buying a house possible. For most people, saving up enough money to buy a house before making the purchase isn’t realistic. As housing prices continue to fall, it can be a good time to start looking for a house or investment property. It’s important to remember the mortgage crisis wasn’t caused because people borrowed money to purchase houses, but that they borrowed more money than they could afford to pay back when the loans reset.
Debt can save money through low interest rates and inflation. Another reason that taking on debt can be positive is current low interest rates. Interest rates for housing loans are still low, but there are inflationary pressures all around which could cause these loans to rise significantly in the future. Locking in low interest rates means that paying off the house will be less expensive than if you buy when interest rates are higher.
In addition, if you are paying a fixed 6% on your house loan and interest rates rise to the point where you can earn 8% at a bank, you could actually earn 2% more than you are paying for the loan. While this is certainly not the case now, it is possible.
Some debt offers tax incentives. When you take out debt to buy a house, you get a tax break on the interest. While this in itself isn’t a good reason to purchase a house, it is an additional incentive that can make taking on debt more positive than it might first appear.
Debt allows you to take advantage of special offers. To attract customers, many retailers often offer “buy now, no payments for x number of years” specials to get people to make purchases when money is tight.
By taking on this debt, the retailer is offering an interest-free loan for a set number of months. The hope is that when the amount is due, you won’t have all the money to pay off the debt and the company can charge you interest. If you were already going to purchase the item, these specials allow you to keep the money in the bank and earn interest on it.
November 11th, 2008 at 8:28 pm
Thanks for spouting back the same “debt is good” lies. I score your post 1 out of 6:
Debt builds wealth – If you can get a *business* loan that dies along with your startup, if you are part of the unfortunate majority of startups that fail, then OK. But if you take out a loan you are personally responsible for, then no – thanks to your failed startup you are now many thousands of dollars in debt with nothing to show for it.
Debt helps your credit score – How does this show that debt is good? If debt is bad in the first place, and you are trying to avoid it, why care what your credit score is? Regardless, this certainly isn't a valid reason to take on debt.
Debt makes buying a house possible – I would say it makes it easier (not 'possible'). Certainly this is the most reasonable point you make, but even so we can see in the news everyday now the downside risks here too.
Debt can save money through low interest rates and inflation – You through out some fairy-tale numbers and use that as a reason – this point of yours is ridiculous.
Some debt offers tax incentives – OK, lets see Scenario 1: I pay the Bank $10000 in interest, and get to pay the government $3000 less that year. OK, so that still leaves me with $7000 less money than if I didn't have to pay the interest in the first place. How is this a good thing?
Debt allows you to take advantage of special offers – I, like the retailers know that what you say doesn't happen 95% of the time. What really happens is that people by things with '90-days, same as cash' or whatever 'special', and then end up paying the balance plus interest over much longer than 90 days. How much interest are you expecting to earn on that sofa over 3 months anyway? $15? Wow, for $15 I think I'd rather just own my sofa.