3 times loan can be a helpful tool. Smart Change: Personal Finance

Sarah Ratner

Personal Finance Advice In some corners of the world, getting into debt is the worst thing you can do. And yes, some types of loans — especially those that charge high interest rates — can lock you into cycles of money for years.

Still, there are times when taking out a loan serves a purpose in your overall financial picture. Debt isn’t always bad, though there’s always the risk of it going over your head. It’s simply a tool you can use to make huge purchases without draining your savings.

Cara Duckworth, certified financial planner and managing director of Client Experience at Mercer Advisors, says, “I think it’s very important for people to be afraid of debt, but rather to see it as something that you can use to your advantage. can.”

Here are some examples of when the ability to borrow money can come in handy.

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for something that can increase in value

Debt is often classified as good or badDepends on the reason you borrow the money and how much you’ll pay in interest.

“Good debt can help you move forward with your career and life,” says Mark Reyes, a certified financial planner and senior manager of financial aid at financial services app Albert. “Bad debt, on the other hand, can keep you from reaching your goals.”

Mortgages are commonly cited as examples of good debt, as a home can appreciate in value. “It’s not a bad debt; it’s going to put a roof over your head,” says Bill Hampton, a certified financial education instructor and CEO of Hampton Tax & Financial Services in Atlanta. Of course, that’s more than you can afford. to borrow or not to borrow loan terms can cause financial risk.

Student loans are another commonly agreed example of good debt, as your education can increase your lifetime earning potential. According to Hampton, “You’ll be in debt for many years, but it will land you a higher-paying job. But if your major doesn’t support your debt, it can hold you back.”

to fund a large purchase

Now for the bad debt: Credit cards. Not only do they charge higher interest rates, but you can continue to buy on them even if you owe money for the previous months. It’s easy to end up with a balance that keeps on rising, no matter how far you try to overcome it.

Although some Credit Card Offer no-interest promotions that you can use for larger purchases. These promotions allow you to spread the cost over several months, often 12 months or more, depending on the card. Make sure your budget allows you to pay it off in the promotional time frame, though — before the interest starts up.

If you have an existing loan, balance transfer cards allow you to transfer that loan and pay no interest for months. But as always, make sure you understand the terms of the card you use — you’ll likely pay a fee for the transfer, and the interest rate will climb back up once the promotion ends.

Once you own a home, borrow against its value in the form of a home equity loan or home equity line of credit – or HELOC – can free up cash for home renovations. Homeowners may choose to do so instead of incurring renewal costs on credit cards that charge higher interest rates.

“Depending on how much equity a person has and their specific situation, it may be better to tap into that than a credit card or personal loan,” Reyes says. “It is the lesser of two evils.”

unforeseen costs for the weather

You’ve heard the lecture before. You need to make emergency savings. But that’s about emergencies—they happen randomly, and sometimes together, whether you’re able to save the extra cash or not.

These are the moments when you might have to make the best less-optimal decisions, and that could mean taking on debt. HELOCs and personal loans can be a low-interest way to borrow money to cover an emergency, but credit cards can also serve as a backup source of emergency funding.

If an emergency expense leads you into credit card debt, Hampton recommends planning to pay off that balance over a few paychecks. You can also take other steps to reduce the cost of your debt, such as moving the debt to a balance transfer card or seeing if your credit card company will meet you halfway.

“Consider calling your credit card company and try to negotiate a lower interest rate than what you’re being charged,” Reyes says. “It’s not always successful and it’s unlikely, but it’s worth a shot.”

This article was written by NerdWallet and originally published by The Associated Press.

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