Is it ok to get a loan?

Being in debt isn't always a bad thing. There's good debt and bad debt, and it's important for us to be able to tell which is which.

But sometimes it can get confusing. Like, is it better to save and invest for a house rather than buy it through a housing loan?

To give you an idea, here a 6 examples of when it's ok to get  a loan, and 6 examples of times you're just burying yourself in debt.

6 Reasons To Get A Loan

  • You're expanding your profitable business

    • That sari-sari store of yours is doing good business. At first, simply re-investing the profits will be able to grow your business. But that won't last forever. If you're going to turn it into a mini-grocery, you'll either wait a long time or have to get a reasonable loan to use as additional capital. The same logic is true even in big businesses, which is why you'll usually read about a conglomerate raising capital by offering preferred shares or corporate bonds - or even borrowing outright from a bank.
  • You're acquiring an appreciating asset

    • Like a house. Eventually, that property can be worth more than what you paid for it - including the interest.
  • You're addressing needs

    • Like a house! 
    • And if safe and reliable transport when you need it isn't always available and if you work nights, or odd hours, and/or need to travel to various places, a car may be a necessity as well. But that doesn't mean a Volvo will keep you secure any more than a Vios.
  • You can pay the monthly amortization with your current cashflow

    • No kind of debt is good if you can't afford to pay it. This is the primary concern, but definitely not the only one.
  • You have access to a safe investment that beats the interest you will pay.

  • You're paying for education or placement fees that will let you get a higher paying job (and you can afford to pay the amortization).

    • Increasing our skills or gaining specific knowledge is one of the best ways to get better income (or additional ones).

6 Reasons To Not Get A Loan

  • You're starting a new, risky business

    • According to Mark Cuban, only a moron starts a business on a loan (and he should probably know, he started a bar on a loan). And in practice, it could be difficult to get a loan for an unproven business anyway.
    • It's better if you can at least give it a try with your own money or other people's money (but with zero or minimal interest to drag you down).
  • You're acquiring a depreciating asset

    • Like any number of status symbols - designer clothes, bags, and shoes; gadgets; even cars if you're not picking the right one.
  • Your car is "old", you have nothing new to wear, your friend/relative/multiple strangers have new smartphones...

    • Keeping up with the Joneses; Be honest with yourself: no matter what you're buying, if you started thinking about it because someone else has it, it might not be necessary. (surprisingly that can sometimes include even a home)
  • You're going to add to your "warchest" because last month's trading didn't go too well. But this month it will be different, so you need to get more funds to "maximize your winnnings"

    • This is almost like Gambler's Fallacy. The only "correct" way in this scenario is if you're taking out a loan to add to your already "winning" stock. And even then it's risky.
  • That big screen TV, lazyboy or home theater is on sale now, and your bonus is is still several months away.

    • When it comes to luxuries, there are no "good deals". If you can't pay it in full instantly, you can't afford it. Better to save up first.
  • You've recently experienced a decrease an income, but that's only temporary until you find a new/better job or get more clients. 

    • Sometimes we just need to adjust to reality. So save up for your emergency fund or be prepared to do away with stuff - or both.

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photo credit: LendingMemo via photopin cc
photo credit: via photopin cc

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