Normally, using debt in your finances isn’t choice #1. However, sometimes debt can be helpful — depending on how you use it and whether or not you go in with your eyes open.
It’s pretty much taken as an article of faith in the world of personal finance that you get out of debt as quickly as possible and never use debt again. However, even though I’ve made plenty of mistakes with debt, I still find a use for it.
Those who know me — who have heard me talk about student loan debt and buying a car — understand that I am not afraid of debt in my life, as long as it is used for practical purposes and with care.
1. Student Loans
Depending on your situation, student loans can help you gain marketable skills. I’m fortunate that my student loan interest rates ?are very low. In fact, they’re low enough that it’s not worth it for me to pay off my loans early.
Student loans can be one way to gain education and skills to improve your earning power. Because they are relatively low-rate and tax-deductible, student loans can be one way to leverage your resources for higher returns.
However, you do need to be careful about how you go about it. It’s important to be careful about getting in over your head. Be careful about how much you borrow and make sure the major you choose will amply repay you.
Student loans can be devastating when you don’t have enough money to make payments. Additionally, if your major isn’t one that offers adequate compensation, your student loans can be problematic and financially devastating. While you do have options when it comes to your student loans, being careful about how you use them is important so you don’t end up stuck.
Most businesses use debt as a way to smooth cash flow and improve the bottom line. Like other reasons to use debt, though, it’s important to be careful about how you go about it. Once again, getting in over your head can result in financial difficulties as well as business problems. Even some of the interest you pay on business debt can be tax-deductible.
3. Personal Loans
Last year, when I moved from Utah to Pennsylvania, I made the decision to get a personal loan to help with the move. We ended up spending $10,000 to unload the house, and even though my ex’s work paid for a good portion of the move, we still had to pay for some of it. While we had other assets, a personal loan seemed the way to go, so I tried Avant. It’s been easy, even though the interest rate is a little high for my taste. However, I was willing to pay for the liquidity and the easy access to the money, and my other investments have yielded enough to offset the cost of the interest, so I’m not sad.
Personal loans can be useful in other ways as well, as long as you are willing to pay the price and — as ever — you are very careful about what you’re getting into.
4. Buying a Car
I bought a car. And I bought it new. With a loan. My interest rate is very, very low. When I’m done with the car, my son will be old enough to drive, and the loan will be paid off. And I’ll probably buy another car. Probably with a loan, although the rates will likely be higher by that point. However, my?credit so far has been good enough to get the best rates, and I can leverage that into buying a car with debt while my investment accounts continue to grow.
5. Smooth My Cash Flow
I also have a seldom-used line of credit that stands by in a pinch, for use when I need to smooth my cash flow. I have a variable income, so having a back is very helpful to me. It ensures that my bills are paid on time, even if my clients are slow. My line of credit isn’t something I tap very often, but it’s there when I need it.
This strategy isn’t for everyone. In some cases, your personal finances can get out of control when you’re using debt. If you use it too often, or you use it without a clear purpose, you can easily end up in over your head, paying way too much interest, and unable to offset it with your other assets.
I know my use of debt isn’t very popular, and it’s definitely not for everyone — especially for those with low financial and emotional risk tolerance. But if you have a definite purpose and a plan, using debt in your finances can be a help.