When is a personal loan a good idea?
There are a number of instances when taking out a personal loan can be of benefit. It may be prudent to recap briefly on a few instances where taking out a loan will not gain the recipient of the loan any benefit, and may in fact be adverse to a financial position.
It is a bad idea to take a loan to buy luxury goods. People get themselves into trouble every day by borrowing for non-essential items. In fact countries get themselves into trouble for the same reason. Borrow to go on holiday….? Bad idea!
It is never a good idea to borrow short term to pay off long term debt, or visa versa. One should always try and match short term debt at better rates to replace short term debt.
Borrowing money to pay off other loans is not always a good idea. It is far better to try and negotiate better repayment schedules, reduced rates or compromises than getting into more debt.
A lot can be achieved by bringing your finances into line by cutting unnecessary expenses and restructuring your debt. This is better than “purely borrowing more to get out of trouble” scenario.
This brings us back to the topic of when is a good idea to take a personal loan. Despite many warnings from those in the know, there are instances when borrowing money can be a good idea. Here are some of the instances that will demonstrate that borrowing money under the correct circumstances can earn one a great deal of money.
Loan consolidation can save a substantial amount of money by lowering the interest paid across various loans. Credit card interest is notoriously high. Certain types of vehicle finance can be exorbitant. It pays one to consolidate all loans into one larger loan at a lower interest rate. The loan becomes more manageable as debt is then simplified into one source. There is a downside if strict discipline it not adhered to.
It is sometimes lucrative to borrow money to take advantage of a great investment opportunity. People borrow money all the time to take advantage of discounted share listings and other opportunities. There may be an opportunity to buy at a bargain price where the item can be sold immediately after acquisition at a good profit.
It pays to borrow in times of high inflation when real interest rates are negative. In other words you will pay back the loan with depreciated money. Therefore if I borrow money today, that same money will be worth a lot less in a few years time with high inflation. One only needs to look at a house bought twenty years ago, to see that the house has appreciated substantially, while the loan amount has stayed the same in nominal terms.
It pays one on occasion to leverage ones situation by gearing up through a loan. In other words one can make money with other peoples money. A good example of this is where one can secure an asset by merely putting down a deposit. When the deposit is paid the asset is on sold at a profit. The deposit is paid for by borrowing the funds. Therefore one makes a healthy profit without ever using ones own funds. This has the effect of multiplying the profit % by many times.
It is also worthwhile borrowing money in a debt restructuring exercise. As long as the end result achieves a lower interest rate and more favourable terms, then borrowing can be beneficial.
It can be seen that a personal loan can be a good idea if we apply good business practice, together with prudent investment opportunities, and a healthy dose of financial discipline. Lots of people have acheived great wealth borrowing money to take advantage of investment opportunities.