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May 11, 2006
To Borrow or Not to Borrow...
Many people fear getting into debt because of their upbringing or personal beliefs. The fact is that using credit is a part of life. Whether you are financing the purchase of new appliances, replacing your furnace or financing your children's education, borrowing can offer real benefits. After all, it'd be pretty tough on the family to have to to wait out a winter while you saved all the money you needed to buy a new furnace. Borrowing money, putting in the furnace and paying off the loan in easily manageable payments makes a lot more sense.
The question shouldn't simply be whether or not to borrow. Sometimes we have to.
Instead, ask yourself:
Do I really need it?
What's this going to cost me?
What else do I have to give up to buy this?
If you need a furnace, my best guess is that your answer to the first question is a resounding yes.
The next question is a very important one. The cost of borrowing can vary significantly. The higher the interest rate you pay, the greater the cost. Also, the longer the term of the loan, the greater the cost to you. By negotiating the lowest possible rate and taking the shortest possible term, you can pay off the loan faster while reducing the overall costs.
But don't overlook the last question either. The more the payments restrict your cash flow, the greater the cost to you in terms of stress and having to go without other things you feel contribute to a comfortable lifestyle. If you choose to make higher payments over a shorter term, you have to be sure your other important living needs can still be met. Resist the urge to steal from Peter to pay Paul. Paying off your loan quickly won't do you any good if you run up your charge cards during the process. If you choose instead to take a slightly longer term so that your payments are lower and fit more comfortably into your cash flow, remember this will mean a longer commitment and more interest over the full term of the loan. Weigh the answers to each of these questions carefully in deciding how you'll manage your credit needs.
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