Personal Loan 101: When Borrowing Money is a Good Idea

 

The term “borrowing” carries negative imagery. You may imagine years of unpaid debt, an overwhelmed budget and even credit damage. While over-borrowing can lead to these fates, choosing a wiser course can produce opposite results.shutterstock_143394364

Consider borrowing money:

When you have it. It seems counterintuitive, but a good time to borrow money often comes when you have it to spare. Consider the following example:

Justin is a world traveler who loves seeing new places. His credit card offers airline miles for every dollar he spends, a perk that helps reduce his travel expenses. Justin recently remodeled his kitchen at a cost of $6,500. Although he had the cash to pay the contracting firm, he used his credit card instead, resulting in an extra 6,500 airline miles. Justin used his cash to pay off the credit card balance at the end of the month.

The lesson: Borrowing can yield strategic benefits. Use your resources wisely.

When the benefits are great. Speaking of benefits, some borrowing can lead to a better future and a better life. Examples include:

    • Student loans. We’re talking about federally-backed fixed loans that are based on financial need. Consider the following example:

Quinn was recently accepted to Penn State University, but her parents cannot afford to pay her tuition. She makes ends meet by living at home, applying for scholarships and qualifying for a $5,500 federal Stafford Loan. She plans to major in mechanical engineering, a profession that will provide her with enough money to repay fixed loans after graduation.

Student loans are burdensome but necessary in many cases. Review my firsthand account and proceed with caution.

  • Mortgages. Buying a home can provide equity and comfort in your life, as long as you have the right perspective. Review our best practices for buying, saving and maintaining a successful mortgage. The result could yield a wise long-term investment.
  • To minimize risk. Borrowing can become a means to an end in many situations. For example:

Lucien has $15,000 in private student loans. His interest rate is variable and has been hovering at 9 percent for the past two years. Lucien’s bank recently sent him an offer for a fixed $15,000 personal loan at 6.2 percent. Lucien decides to apply for the loan and uses his cash to pay off his student debt. This strategy allows him the safety of fixed payments at a lower interest rate.

Borrowing from one to pay another is risky, but in Lucien’s case, the choice was sound. Talk to your financial planner before taking the next step.

  • To improve credit. Every reason listed above has one thing in common: credit impact. Borrowing is an important part of maintaining an active and positive credit score. Debt utilization and payment history account for 65 percent of your credit, and borrowing is a necessary part of the equation. Talk to our professionals about your credit file and ways to improve your score. Borrowing could be on the list.