Avoiding Debt as an Irrational Credit Solution

Determining When It's a Good Idea to Borrow Money

Mar 13, 2010
Katrina Dayrit

A Man Trying to Borrow Money From a Friend - quaziefoto

Completely avoiding debt isn't always a good idea as there are times when the best credit solutions involve borrowing money.

One of the most difficult financial decisions to make is when to borrow money for a major purchase. Whether it's for buying a new house, obtaining a college degree, or starting a new business, the amount of funds required often makes it impossible for people to make investments for their future with their own funds. Choosing to borrow money is not at all a poor decision. In many cases, it is definitely among the smartest credit solutions. However, there are times when avoiding debt and using personal funds is much wiser.

Simply put, debt can be a major hassle in anyone's life. It can follow anyone around for years and home mortgages can be very restricting. Debt, being one of the major hindrances in people's lives, should generally be avoided, except in specific circumstances when borrowing money is actually the most beneficial among the available credit solutions. Here are three major circumstances where it's a good idea to borrow money and credit should be used as a primary source of funding.

When Current Income is Lower Than What Will Soon be Earned

For a lot of people, potentially higher earnings are the main reason to go to college. However, along with those higher earnings comes with high course fees and the supportive costs of housing, textbooks and computer equipment. While many students keep a part-time job during their college years, the income that it brings in is effectively nothing next to their future jobs.

Those in a situation where avoiding debt would mean lost income opportunities, using up available credit is always among the best credit solutions. In this case, not going to college means forgoing possibilities of better compensation packages. Taking on student loans is a smart move and should be among the best credit solutions in this case as long as the predicted income upon graduation is enough to settle the loan with interest. The same is true for people looking to obtain additional training or certification after college.

Permanent employees due for salary increases may also be tempted to borrow money for different purposes, knowing that they will soon be earning more than they currently are. Whether avoiding debt in that situation is a good idea or not will depend on what the credit will be used for and how surely the salary increase will take place. With the global economy at its current state, it seems even permanent employees are not so permanent anymore so credit solutions should always be carefully evaluated. It may be a better idea for people to avoid spending what they don't currently have unless, of course, it is absolutely necessary.

When the Need to Borrow Money is Based on an Information Advantage

Thousands of poor moves have been made in business with debt doing nothing to soften the blow of failure. With more and more businesses going under today, borrowing money as a credit solution to invest in a business or company is becoming difficult to justify.

However, if there is a clear information advantage for the business, avoiding debt would be a poor move. Taking on available credit, then, is justifiable and often very intelligent if high returns are guaranteed. Nevertheless, it is good to be careful and one trying to make the decision between avoiding debt and taking the option to borrow money should always do the necessary research and risk analysis.

When the Need to Borrow Money is Tied to a Real, Concrete Value

This line of reasoning is being bashed around lately, primarily thanks to the collapse of the real estate industry and the terribly ineffective loans given out in the last three years. From no-deposit homes to complete mortgage defaults, the real estate industry has effectively caused its own demise, and tying hard value to real estate is no longer as easy as it once was.

However, with that collapse comes instability and wild contrast, two factors which lend themselves to volatile markets and potentially lucrative deals. Those who are experienced enough to navigate these difficult conditions, the potential to buy a lot of valuable assets at incredibly low prices is huge. Using up available credit, then, is a a good idea and one of the best credit solutions available.

These are just three situations where using credit is quite intelligent. Of course, whether or not people should use loans and credit to fund their personal investments, business investments or property investments is completely up to them. Individuals should be able to judge their own situations and they should compare various credit solutions as well as their loan funding, equity funding, and personal funding options before determining whether avoiding debt is a good option or it is a better idea to borrow money.

Related Reading: