This post has been contributed.
The importance of staying out of debt wherever possible cannot be stressed enough. However, that being said, there are times in life when staying out of debt is not an option, when you are in desperate need of funds and borrowing money is your only option, debt doesn’t have to be a bad thing. The key to getting into debt is how you get into that debt - there is good debt and bad debt, and it is important to understand that. With that in mind, the question is: when is it acceptable to borrow money and get yourself into debt?
You need to understand good debt and bad debt
When it comes to borrowing money, it is crucial that you understand the difference between good debt and bad debt. The fact is that not all debt is bad, believe it or not.
Bad debt is the kind of debt that comes from failing to make your bills payments or falling behind with your credit card repayments. It is the kind of debt that leads to debt collectors knocking on your door, court orders, and black marks on your credit record. This is not the kind of debt that you want.
Whereas, good debt is taking out a loan, like a working capital turnover loan for your business, that will help you in the short-term and can be paid back over a set period of time. There are some loans, such as payday loans, for instance, that come with very high rates of interest, and thus are not a type of good debt. However, bank loans, mortgages and credit cards, as long as they come with low rates of interest, are good loans.
When is it okay to borrow money?
There are two main instances when it is acceptable to borrow money, these are discussed below.
1. It’s okay to borrow money if times are tight. When times are tight, and funds are running low, it is okay to borrow money. However, that being said, it is only okay to borrow money if it is an affordable amount to pay back - it is crucial that you also take into account any interest. The fact is that when you borrow money and can’t pay it back on time, that is where problems arise. So it pays to consider whether a loan is truly affordable before choosing to take it out.
2. It’s an investment for the future. Should a loan be an investment for the future, such as being used to set up a small business or buy a home of your own, then borrowing money for this purpose is acceptable. Presuming of course, that the amount is affordable to repay within the set repayment period.
You may not like the concept of borrowing money - few people do - but if it is necessary and the money that you are borrowing constitutes a ‘good’ loan, then there is no reason not to do so, if the funds are needed, that is.