When to Get a Loan and When to Tough it Out

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Buying, saving, investing, and borrowing are four components of the personal finance life that need to be in balance, if you are to grow your wealth and be ok, financially speaking. We’re going to look at spending and borrowing during this post – specifically, when to do one or the other. Borrowing is part of our national identity. Most of us carry several credit cards, and have other types of loans with a number of different financial institutions. The trick tends to be how often to take out these loans. If you’re trying to improve your financial life, you probably want to think about this question carefully. When is it best to take a loan, and when is it best to tough it out and save up?

When we take out loans, we are borrowing money from a lender, and also paying back interest. Interest (and its associated fees, added together and known as APR) is the money that the lender gets paid for letting you borrow their money. It is also the money that the lender uses to allay their risk – the risk of not getting their money because you decide not to pay, or can’t pay for whatever other reason. It’s really important to look at the APR of each loan you think about taking out. Lots of people just look at the amount of money they’ll be asked to pay for the duration of the loan, but the APR is really where they get you. If you are paying 10%-25%, as is associated with many common loans, you’ll be paying thousands of extra dollars over just a year or two.

Therefore, it’s important to borrow at high APRs only when you can pay the loan balance quickly (in just a few weeks or months) or when the amount borrowed is very very low. Many of us will find ourselves in situations when we have to put something on credit just to make ends meet, and this is OK every once in awhile, but it should be a major exception rather than the rule. In general, all spending should be made with cash that you have, not money borrowed from someone else. Remember, you have to pay back everything you borrow, and then some. If you can’t do it now, why assume that you’ll be able to do it later.

Other kinds of lending are designed to be affordable, because it is in the national interest that they be so. Take mortgage loans, for example. Buying a house is expensive, but it’s good for people to do it because they become more stable members of society, typically. These borrowers also tend to pay back their Viva loans very reliably, since they are tied to their safety and security. In general, loans that are part of getting you through the basic functions of life (housing, transportation) are too big to be paid in cash, but are nevertheless necessary. These loans are made affordable for people like you, so take them out if you can afford them, and try to pay for everything else in cash.