• Zach

When is it a good idea to borrow money?


Times are tough. Budgets are tight. Even with news of COVID vaccines on the horizon, they aren't here yet. Even when it rolls out, will your industry return to what it was? Will a properly globalized world with air travel and concerts come back? I sure hope so. I dream of that day.

In the mean time though, many people are stretched to the financial breaking point. They are casting about for any calm port in a never ending storm to not only support themselves, but family members who also may be facing unprecedented costs. For some, that may lead to dangerous borrowing. But that leads to an important question, in what circumstances should you borrow money? When is it potentially ruinous, and when is it a viable life raft?

In normal circumstances a good rule of thumb is to borrow money to buy assets that will be income producing, especially if there's a low interest rate that is less than your return. For example, if you can buy real estate with a 3% interest rate, and expect a 8% rate of return on your money, you're making 5%, so that's generally considered to be a good investment. If you need to take out a loan for school which will allow you to get a raise or a new job that pays more, allowing you to pay off the loan in what you consider to be a reasonable time frame, that's ok.

Going into debt in order to buy things that don't make you money can easily ruin you financially. That includes cars, boats, clothes, bags, vacations, weddings, shoes, brunches, etc. Those things won't make you money, and many of them can become financial vampires that continuously drain your bank account for years with fees for maintenance, insurance, and interest on the loan. If it's a liability like this, pay for it with cash. This will save you a lot of headache.

This is especially true if you have to pay for liabilities with a credit card. Credit Cards in the UAE charge nose-bleed-inducing interest rates around 45%. Those fees mount exponentially and digging out of that hole is nearly impossible.

COVID job losses make these principles even more critical to follow, but sometimes, when your salary dries up, loans can be the only thing that keeps you from being homeless or starving, or being able to support family in similar situations. To me, it can be useful to pay for education that allows you to move into a different field that is more resilient in the face of the current situation. If you have to go into debt for school, make sure it's for something that will give you a steady paycheck afterwards. If you can find training that is free or certifications like Google just started that are much cheaper than University fees, do your research, it may be the difference between a mountain of debt that is un-payable for decades and a much more manageable pile of money that you can tackle easily with a new career.

Whatever you do, don't take personal loans at really high rates, especially from sketchy "private" lenders that prey on those in need. The rates and fees may be hidden, and their ways of getting their money back can be dangerous, to say the least.

As always, do whatever you can to downsize your expenses so that you need smaller loans to pay them. Fully understand anything you sign. Do not take out loans for liabilities. These times are tough, try not to make them tougher, no matter how easy the solution seems to be.


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