Notes on Parenting

Insights for parenting babies, toddlers, teens, and young adults.

Monday, September 20, 2010

To Borrow or Not To Borrow

That is the question many young families ask themselves. Let's say you’ve just finished school and start (finally!) receiving a regular salary and you’re ready for a great house with a big yard, nice car, big-screen TV, etc. Of course, you don’t have money right off the bat to pay for it all in cash. Should you borrow to get it? Luckily, the answer to the borrowing question is simple.

If it’s a consumer loan (which is generally used to purchase big-ticket items: cars, furniture, electronics, etc.) that you’re considering, I advise against it. Consumer loans are generally very expensive because of their high interest rates. Don’t be tricked by the “teaser rates” (very low or zero interest for the first six months or year), because the financing company must charge very high rates following the teaser in order to make the loan worth their while. Another reason that consumer loans are expensive is that by paying interest, you must use money that you could have otherwise invested and earned money on.

Consider these points while making the decision:

  • First and foremost, is this purchase in your budget? Is it a want or a need? (Items that carry consumer loans are generally wants – you can save up for these instead of taking on debt)
  • Add up the total cost of the loan – principle plus interest. Also consider how much you could be earning if you saved that amount instead.
  • Would this purchase be consistent with your family’s goals? Would you be preventing your family from being able to put the money toward something more valuable by making this purchase? Remember that we often must give up something we want now in order to get something we want more.
On the other hand, loans for education or a modest home are probably okay. Education is like an investment in your potential as a future , so borrowing to be able to get a quality education is much like a business investing in capital. Likewise, borrowing for a modest home is generally acceptable. Keep in mind our recent financial climate, wherein consumers who over-borrowed are now in a world of hurt. The families who were modest with their borrowing have generally had much greater peace of mind (and probably peace in their homes) in these past few years.

So the answer to the borrowing question is easy. If it’s a want, you can save up for it. If it’s a need or an educational investment – borrowing modestly is usually fine. Any debt, good or bad, takes away a little more of your financial freedom, because with each dollar of interest in your debt payment, you are giving up your freedom to choose what happens with another dollar of your paycheck. Always remember that your decisions to borrow have a great impact on your family and marriage.

I'm Jenny Willardson from A Young Mom's Guide to Motherhood, Money, & Marriage, and I'm excited to be a new guest author on Notes on Parenting! Look for me every 1st and 3rd Mondays of each month for more advice on family finances.



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