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Four Reasons Why it May Pay to Go Into Debt
Debt is a four-letter word of the bad kind, according to some people. The type of thing that shouldn’t even be considered by responsible adults. However, not all finance professionals agree debt is something to be avoided.
Not all debt is created equal, there may be some types of good debt.
It may pay to go into debt for one of the following four reasons.
Reason No. 1: To Buy a House
For many people, home ownership is only possible through debt in the form of a mortgage. The average cost of a home sold in November 2015 was $374,900, according to the U.S. Census Bureau. That price makes it impossible for many U.S. families to pay cash for property, unless they save for years or even decades.
That’s not something people should have to do, taking out a mortgage at a younger age can improve a family’s quality of life.
Beyond that, a house is an appreciating asset that will grow in value over time. As a bonus, interest payments made on a mortgage can be included in itemized deductions for federal income taxes. Together, these factors add up to mortgages being a smart debt choice for many people.
Reason No. 2: To Get an Education
Despite chatter in some circles about a looming student loan crisis, many experts still say debt for educational purposes can be smart. It’s an investment in human capital.
Data from the Bureau of Labor Statistics backs up the assertion that higher education equates with higher income. The following are average weekly incomes by education level for adults ages 25 and older in 2014, the latest year for which numbers are currently available: Less than a high school diploma: $488
High school graduate with no college: $668
Some college or an associate degree: $761
Bachelor’s degree only: $1,101
Bachelor’s degree and higher: $1,193
Advanced degree: $1,386
Debt for training or a technical course can be a good investment if it will unlock greater earning potential.
Reason No. 3: To Start a Business
Taking out a loan for business purposes can pay off. When small businesses need an inflow of cash, they typically either go into debt or raise equity through private investors. Although going into debt can be risky, particularly if the lender requires the business owner to be personally liable for payments, it can be an easier option than looking for investors who essentially become co-owners in the venture.
Reason No. 4: To Take Advantage of Low Interest Rates
The final reason why it might pay to go into debt is also a point of contention among financial experts. That reason is to take advantage of the current low-interest market.
If you want to buy something and are thinking about putting it on a credit card with 15 to 20 percent interest, that’s probably not a good decision. However, it may make sense to get a car loan at 2 percent rather than pulling cash from investments that are earning 6 to 8 percent.
It can be a smart move to take out a low-interest loan in order to let investments grow. People need to consider the term of the loan, the value of the car and how quickly it will depreciate before making a decision to finance.