Guide

3 Times Getting a Loan Is a Smart Idea

3 Times Getting a Loan Is a Smart Idea
Written by Publishing Team

A couple meets with a banker to discuss their finances.

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Can religion really be a good thing?

In many cases, borrowing money is something to be avoided. After all, if you take out a loan, you have to pay interest – an additional cost. You also commit future income to making payments, which gives you less flexibility moving forward.

But despite the common misconception that borrowing is always bad news, the truth is that there are situations when getting a loan is a good thing. Here there are three of them.

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1. When your loan improves your net worth

Sometimes you can borrow for something that will actually make you richer in the long run.

One of the best examples is a mortgage. The mortgage comes with a very reasonable interest rate, and interest can even be tax deductible if you detail when filing returns. Plus, it allows you to buy a home, so you can start building equity, stop wasting money on rent, and hopefully benefit from rising property values.

Another good example is a business loan. If you can borrow money at a low rate to start a profitable business that increases your profits, doing so may be a smart decision.

You’ll want to think about the cost of borrowing against the future value of the asset you’re taking out with the loan to determine if the debt is good or bad for you.

2. When your loan makes paying down debt cheaper and easier

In some cases, a personal loan can actually make it easier to pay off debt. This can happen if you take out a low-interest personal loan to refinance or debt consolidation.

Let’s say, for example, that you owe a lot of money on credit cards that currently charge 20% interest. If you can qualify for a personal loan to pay off your credit card at a 9% interest rate, getting that new personal loan could cut your rate in half. And the effect can be even more dramatic if you take out a personal loan to pay off your payday loans, which can sometimes reach interest rates of up to 400%.

If you can get a new loan at a lower rate than your existing debt, refinancing could be a really smart financial move. And if you use your new loan to pay off multiple debts, this level of debt consolidation may actually make repayments cheaper. And Easier because you’ll be reduced to only one low interest monthly payment.

3. When your loan helps you build credit

Lenders love to see a mix of different types of credit on your credit report. This means that you will have a better score if you have some loans with fixed repayment schedules along with credit cards. For this reason, you may want to take out a small car loan when buying a car and pay it off quickly even if you can afford to pay cash for the car. Or you may want to take out a small personal loan at a low rate to finance a purchase and then focus on paying it off as quickly as possible.

There are even some specific types of personal loans designed just to help you build credit, such as credit building loans, that cater to borrowers with bad credit who may not be able to get approved for financing. These loans can help you greatly improve your credit score, which may make future borrowing easier.

As you can see, there are several reasons why borrowing is a good thing. The big question isn’t, “Are personal loans bad?” Or, “Are other types of credit bad?” Instead, ask yourself what you’re doing with your debt. If you use it as a tool to improve your posture, that’s a good thing. But if you’re borrowing to fund a lifestyle you can’t afford, you might want to think twice.

Ascent’s Best Personal Loans for 2021

The Ascent team has scanned the market to bring you a shortlist of the best personal loan providers. Whether you’re looking to pay off debt faster by lowering your interest rate or need some extra cash to tackle a large purchase, these best-in-class choices can help you reach your financial goals. Click here for the full summary of The Ascent’s top picks.

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