Taking out a loan means going into debt, and debt is bad. So, that must mean borrowing money is a bad thing, something only the financially irresponsible and desperate do, right?
Most of you reading this will know the above statement isn’t true. But it is true that many people have unhealthy levels of debt. How and when should you take out a loan?
Good Debt vs. Bad Debt
Many of us would like to live a life where we never have to take out a loan. That circumstance would suggest we have the wealth to just pay for everything we want outright. But for the vast majority of Americans, this isn’t reality. (And even the ultra-wealthy take out loans, but that’s another matter altogether.)
Roughly 60% of American homeowners have a mortgage, and a mortgage is a type of loan. For many people, homeownership just isn’t practical without the aid of a mortgage. So, as we can see, loans can be very healthy and beneficial.
Good Situations to Take Out a Loan
Good debt helps you build equity or improve your financial future. Examples include:
- Building credit: While not a reason to take out a loan, by making regular loan repayments on time, you can improve your credit score. If financial institutions see that you’re trustworthy, they’re more likely to offer you loans in the future.
- Emergency expenses: Having a strong credit score is critical when unexpected and unavoidable costs rear their ugly heads. These are situations like medical emergencies, vehicle troubles, and loss of employment.
- Home repairs and renovations: Financing major home improvements can increase the value of your property. Home equity loans or renovation-specific personal loans can facilitate this work.
- Small business loans: If you own a small business, there are many financing options available to help you establish and grow your business. The Small Business Administration offers loans for this express purpose.
- Debt consolidation: Loans can lead to unhealthy debt, but they can also help solve that problem. Using a new loan to pay off multiple high-interest debts, especially credit cards, can simplify payments and potentially secure a lower overall interest rate.
Bad Situations to Take Out a Loan
Bad debt can be financially crippling. It’s typically unwise to seek a loan for any of the following reasons:
- Discretionary purchases: Using your credit card to pay for a flight or new laptop is fine (assuming you’re not already carrying a large balance). But taking out a loan for non-essential spending is unwise, because these purchases provide no long-term financial benefit.
- Paying for basic living expenses: If you can’t pay your monthly bills or for the necessities of life without a loan, you’re already in trouble. Such situations require an honest overview of your financial situation.
- Investing or gambling: Using borrowed money to invest in the stock market or gamble is extremely risky. Never gamble or invest money you don’t already have — and can’t afford to lose.
Want To Know More About Loans?
If you’re considering applying for a loan* and want to learn about your options, contact a Vectra Bank professional today.
*Loans subject to credit approval. Terms and conditions apply. See banker for details.
