Personal Loans - How to Borrow Money Responsibly?

Nov 12, 2013: Nowadays it is normal for the average person to have some sort of debt, whether it be school loans, a mortgage, or credit cards. After all, this is the day in age in which people are living beyond their means (according to financial experts). But is all debt bad? How much is too much? And how do you know if you are borrowing responsibly?

All these questions can be overwhelming and finding answers can be tedious and time consuming. So what does the normal borrower do? Borrow anyway. If it is a situation where the borrower needs the money for an emergency, then of course what other option do he have? In fact, at this point, borrowers can be trapped into high interest rates that charge ridiculous percentages and could end up paying nearly twice as much as they borrowed in the first place. But you can borrow responsibly, by recognizing the difference between good debt and bad debt, and doing your research about personal loans.

Easy Ways to Borrow Responsibly: Know the difference between good debt and bad debt.

Good Debt

School loans are considered a good debt. Borrowing money for the education that will insure a better job with higher pay can only be beneficial. In fact, it is proven that higher education earns higher paychecks. Workers with a four-year college degree typically earn more than 60 percent than workers with only a High School Diploma. A Master's degree will earn you twice as much as a worker with a high school diploma and a professional degree will earn you three times as much. So education is a good investment. In fact, in 11 years, graduates can earn enough to pay off the money borrowed for their first four years of college.

Real estate or mortgage loans are good debt. Investing in something that will gain value over time is... well, valuable. It ensures that as you are paying on the property which is accumulating value, and therefore promising you a return on your investment. Property investments are great investments, as long as you are smart about what you get yourself into.

Personal loans can be both good and bad depending on what you are using the money for. If for instance you are borrowing money to put a new home theater with surround sound in your basement... not good. If you are borrowing money to invest in a business in which your estimated return is double the amount of the loan (including interest) then you are doing great. Just remember, think responsibly.

Bad Debt

Credit card debt is bad debt. If you are using a credit card to buy something, than you can't afford it. This is bad debt because credit cards are used to buy things that normally decrease in value the moment you purchase them. The new stereo, DVD or outfit purchased on a credit card, decreases in value after you remove the tags and shrink wrap. While the item is decreasing in value, the interest on your credit card accumulates (unless of course you pay your balance off immediately), and you are paying a higher price for a less valuable item each month until it is paid off. A personal loan to reduce credit card debt can be a good investment.

Buying a car could seem like good debt, but the reality is that it falls into the same category as credit cards. This is mainly due to the fact that the value of the car decreases over the years that you have the loan. So once you have the vehicle paid off in full, you have paid more for the car than what it was worth, and the car has decreased substantially in value, making it a rather poor investment in the end, to say the least.

It remains to be said that if you have the cash, pay in cash. It is better to not have debt than to have it, even if it is supposedly necessary in order to gain credit. And a little research about personal loans has never hurt anyone, so be sure to do your homework before you get too deep in the hole.

Image Source(s): iStockPhoto

Related Posts