A frugal person tries to define good debt and bad debt. When does it make sense to get a personal loan?
You know me; I’m a frugal person and I hate debt of all kinds. I hate it even more now that I have too much of it, than I used to hate it when I avoided it like the plague.
But some debt does make sense, so sometimes a loan makes sense. Here are a few times that even I don’t mind going into debt…
Buy a home. Let’s face it, if you wait until you can pay for your house outright, you will never own a home. You will always rent from someone else and pay down someone else’s mortgage. There are very few frugal purists who will argue against this point. And since house prices historically climb at a somewhat predictable , if uneven rate, a mortgage is generally a good investment. Sometimes it’s an incredibly good investment.
But even on mortgages, look what Big Cajun Man says…
“Yup, you might have to get a Mortgage, but don’t get comfortable with it, treat it like you would a Cockroach or an Uninvited Guest (fill in your most unfavorite person here), want to get rid of it, as soon as possible.”
Buy a car. Cars are pretty expensive, so it is hard to save up enough to buy a car outright. But unlike a house, it is possible for many people. And unlike a house, a car depreciates in value.
I actually bought my first car outright. I simply waited until I had saved up for the vehicle, based on a simple premise: spend only what you have earned.
Nevertheless, most people will need to spread a car purchase out over several years, so unless you are very patient, you will want to finance the purchase. Which is what I have done with all further car purchases. But, I have bought used cars each time, rather than incurring debt at top dollar for a depreciating asset.
Watch this video on why you should not borrow to buy a new vehicle:
Pay for education. Taking out a loan to pay for college or university is generally considered to be worthwhile, for two reasons. First, at that point in a person’s life, large amounts of money are rarely saved up. Second, it is the degree that will help you to earn the money to pay for the education – until you get the education, it is very hard to earn enough money to pay for the education.
” Borrowing to go to school gives you an education and a debt. The education part is good and the debt part is bad. When people say that this is a good debt, they mean that you’re better off with both the education and the debt than you are with neither. But by itself the debt is still bad.”
Once-in-a-lifetime opportunity. There are some opportunities that come along once in a lifetime. For me, it was when both my mom and my uncle were in Hungary at the same time, and I had the chance to bring one of my daughters with me and make it somewhat of a family event. The stars would not align so perfectly ever again, and there was no way on relatively short notice to save up the money for the trip.
If you need to borrow for these kinds of opportunities, here are a few places you can start to look for a loan:
If you want to borrow for other types of expenses…don’t.
People borrow for vacations and for entertainment and for leisure. These things are not necessary, and if the debt remains for five years at a 20-percent interest rate, the actual cost is double the sticker price. In other words, if you go into long-term debt to buy something that is 25-percent off, you are NOT being a crafty shopper. You are being a sucker.
People borrow for food and clothing; these are both necessities, of course, but instead of downsizing their taste, they upsize their debt. Bad idea.
Debt sucks. The only reason to take on debt is if the alternative would be worse. But understand that as soon as you take on debt, you are essentially saying, “OK, I’ll pay through the nose for that.” If it’s worth paying through the nose, then the debt is worth it.