What are some good reasons for not borrowing money?
May 10, 2007 by Michael Redbourn
A lot of companies will be very happy to lend you money and it's tempting when interest rates are fairly low. But it's not always the best financial decision!
Four dangers related to borrowing too much
1. It can become a habit
One study looked at people who borrowed more money by increasing their mortgage. The results showed that most of these people still had the same level of debt or even more two years later. The biggest danger for these families is that they can lose their homes if they can't keep up with the higher payments.
2. It takes away money from other important needs
When you borrow money, you have to pay interest. That's money you can't spend on anything else including things that could grow in value like your home.
3. Your credit rating will be damaged if you don't pay the bills
If you fall behind on your bills you won't be able to borrow any more money. You may also have to give back the goods you bought using borrowed money.
4. It can lead to high-interest payments that are harder to make
The more debt you have then the harder it is to get a low interest rate when you really need to borrow.
Three specific situations when it's good to avoid borrowing
1. Paying your everyday expenses
You shouldn't need to borrow in order to pay your monthly bills. If you do, you are spending more than you are earning.
2. Covering optional spending
You'll save money if you pay cash for extra costs like a new TV or a vacation. Many experts say borrowing makes sense only when you do it in order to buy something that will go up in value like a house.
3. Borrowing when you know you can't afford the payments
These same experts say that you should never pay more than 35% to 40% of your gross income each month towards debt. This includes your mortgage, your credit cards and any other form of debt.
It's not a good idea to borrow a lot thinking that you will just pay the minimum back each month. It may take a very long time to get out of debt and you'll end up paying a lot of interest. Also, if you have one late payment, your credit rating may suffer and you'll be charged penalties.
Remember: These days it's easy to borrow but it may not be your best choice.