Things come in one category or another: the good and the bad. But when it comes to borrowing money, no debt is good debt. You probably hear it every day, the reasons why people generally believe that borrowing can ofttimes lead to adverse results in the long run. Bad credit can keep your head underwater. There are times when you find yourself drowning in debt and there’s just no way out of its fuzz. That’s the bad part.
On the flip side, taking out a loan can be a great idea, too. However, debtors must learn to focus on smart debt. The only time you’ll know it’s a smart debt is when it increases your net worth; otherwise, it’s bad. Also, remember that a loan, in order to become a ‘good’ loan, requires the right control and proper management.
Considering the positive and negative reasons for borrowing, you need to be careful about making your decisions and know whether it is the right course of action to do. In this article, we will help you weigh the pros and cons of applying for a loan.
Best Reasons to Take Out a Loan
You meet your short-term needs
Loans are most considered by people whose short-term needs and goals are quite urgent while their budget seems to run out. By either approaching financial institutions for personal loans or sending SOS from family members and friends can help you pay off other consolidated debts including more personal accounts such as the following bullet reasons below
- Home Rentals and Repairs
- Student Loans
- Wedding and Moving Expenses
- Personal Goods
- Travel Fund
- Buying a Car
- Medical Bills
It helps grow your business
Not only you can use these loans to satisfy your short-term needs but you can also consider loans from several financial aids if you have reasons to pursue some long-term goals like paying off your mortgage when putting up a small business.
If you want to pursue entrepreneurship, you won’t dare to risk all your personal accounts so either secured or unsecured business loans can act as a metaphorical support system when planning to put up your own business or fund for its expansion and growth in the long run. Consequently, unlike a stereotypical point of view on considering loans, entrepreneurs see debt in a different and a little ‘positive’ way.
Fluctuate Interest Rates
Financial institutions may differ in interest rates, might as well, look for a bank that attaches a lower value of interest to the borrowed amount. If you haven’t heard yet, the interest fluctuation that runs from your debt in the bank or in any other financial firm may reflect on how your credit score looks like.
This may seem self-explanatory but there are chances of getting a lower interest rate if you have a favourable credit history. Otherwise, expect higher interest rates for bad credit scores. Garnering higher interest can eventually make your loan more expensive and you surely won’t like it so you have to watch interest fluctuations to schedule loan applications when rates are still low.
Business taxes are lowered
Other reasons that encourage most entrepreneurs to consider loans is the surprising benefit they get from paying interest on their debt. Loans can actually reduce your business taxable profit which helps you pay less cost of tax expenses. Thus, almost all companies create common reasons for seeking loans rather than giving up on the entire equity in order to survive and expand the business.
Loans encourage discipline
Your loans can serve you two things: satisfy your short-term or long-term needs and teach you to become more disciplined at the same as well. Since you already know what comes your way when you don’t pay your loans ahead of your due date, you surely won’t like facing its troubles and consequences so you have no other luck but to manage your debts correctly.
In this light, debtors are strictly encouraged to apply discipline when it comes to borrowing, using the amount borrowed in a lucrative way, and return the amount owed ahead of time.
Worst Reasons to Take Out a Loan
You finance a lifestyle you can’t afford
Having the convenience of borrowing money, you also get to live beyond your means by funding an unaffordable lifestyle. Some people forget to live on what they earn, which is why they likely end up going deeper into debt. Remember, loans can’t always solve your problems.
It’s a trap
Lenders are marketing personal loans for all kinds of purposes and debtors are taking advantage of this rare opportunity. However, taking out a loan to pay for unnecessary yet unaffordable purchases such as luxury vacations or grand weddings is bad news.
By doing so, you are making your future self miserable as you commit the money you haven’t earned yet to pay for something you can’t afford, not to mention the interest it might incur.