People borrow money for all sorts of reasons, but experts say you should only borrow for two very broad purposes: to acquire assets and to meet emergency cash flow needs. That’s it. It seems like a very narrow list, but the first reason is extremely broad in scope. Borrowing to acquire an asset can mean many things: buying a car, moving into a new home, acquiring an RV or purchasing 1,000 shares of stock.
What are the most sensible reasons to borrow? Here’s a quick list of what debt counselors and financial advisors say are the smart reasons to borrow:
To Finance Education
Borrowing to pay for college is a common reason many adults borrow money. While many prospective students will take out student loans, parents have special resources they can tap as well. Parent PLUS loans, in essence, work the same way traditional student loans do, except the borrower on record is a parent. Parents often take out these loans to help their children avoid accruing too much student debt, but can feel the heavy financial burden themselves. If this is your case, it might be time to consider Parent PLUS loan refinancing, in order to lower your current interest rate and improve your finances. Forgiveness or student loan refinancing within six months of graduation should be researched before you get too deep into a Parent PLUS loan repayment.
Regardless of who is borrowing the money, mom, dad, or the student, acquiring debt to pay for educational expenses is an ever increasing segment of the lending economy and grows significantly each year. Financial experts consider student loans in the category of borrowing to acquire an asset, with education being the intangible asset the borrower is getting in return.
Purchasing a Car
Another popular reason people borrow is to finance ownership of a car. About five percent of car purchases are for cash or in full exchange for other cars, but the other 95 percent of these transactions are bank-financed vehicle purchases. The expert consensus is this: you should only finance a car purchase if you can’t afford to pay cash, and you should only finance the amount you can’t afford to put toward a down payment.
This second area is where many people fall short, according to loan analysts. Banks typically offer generous terms on auto loans and actually encourage borrowers to make low down payments. That’s good business for banks, who earn higher interest payments, but not always good for borrowers, who end up with loans larger than they need.
Owning a Home
In terms of dollar value, mortgages make up the biggest category of borrowing. While there are more auto loans than home loans, the latter category doesn’t even come close to the total dollar value of home loans at any given time. However, both vehicle and home loans are classic cases of taking on debt to acquire an asset, so both are legitimate reasons to borrow.
Borrowing to Pay Emergency Expenses
Emergency borrowing includes situations like unexpected medical bills or destruction of property by fire or flood. Insurance doesn’t always cover the full amount of such losses, so consumers often have to take out loans to pay for necessary living expenses until they can get back on their feet.