When to Borrow Money, and When to Abstain

When to Borrow Money, and When to Abstain

Americans borrow money all the time. Whether it is in the form of a formal loan or money charged to a credit card, almost everyone borrows money, sometimes every single day. There’s nothing wrong with borrowing money. Without borrowing, it’s almost impossible to achieve healthy personal goals and to build wealth. On the other hand, we all know a few people who have borrowed a lot more money than they can handle. This oppressive debt is a major struggle for millions of people, as hard to overcome as a drug addiction.

It’s clear that when to borrow money is an important decision. With so many lenders available, today more than at any other time in history, you won’t lack for opportunities to have people give you money. But you will have to be very choosy when it comes to selecting loans that are available to you. Pick the right ones, at the right times, and you’ll set yourself up for life. Pick the wrong ones, and you could go broke.

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One way to understand if a loan is good for you is to look at how much it costs. You won’t pay for a loan like you do for a meal, right when you use it. Instead, you’ll pay for it a little bit at a time, every time you make a regular monthly payment. The extra money you pay each month is made up of interest and fees, together totalling the loan’s Annual Percentage Rate (APR).

If you were to get a loan with a very high APR, then you would risk putting yourself in a debt spiral unless you were able to keep up fairly aggressive payments. If you were to miss a payment every now and then, the debt would likely grow faster than you were able to pay it off, resulting in debt that’s never ending.

For this reason, it’s a good idea not to take out loans above 20% if you can possibly help it. If you have sufficiently good credit, you likely won’t ever have to break 10%, which is great! Unless you absolutely need the money, it’s a good idea to focus on measures you can control to improve your credit history and credit score. When these personal finance measures are improved, you’ll have a lot more options when it comes to borrowing money. Most of them will be cheaper than what you were offered when your credit was poor.

Even though it’s a good idea to take loans only when you absolutely need them, don’t neglect to get a loan if you really do need it! Loans can help you improve your life in a way that your own income is unlikely to accomplish. Just make sure you can handle the payments and that you’ve found a loan with the lowest possible interest. Good luck with all future borrowing.