Should You Take on Debt? How to Decide

By Mike Peterson
In June 12, 2015

Should You Take on Debt?  How to Decide

It might surprise you to know that I’m not 100 percent anti-debt.  As someone who has made a career out of giving debt advice, I know that debt problems can be devastating – especially when there’s high-interest credit card debt involved.

But I also understand that, in some cases, debt is hard to avoid.  That’s why, to me, debt management isn’t about having zero debt.  It’s really about making good decisions when it comes to debt.  And that means thinking carefully and weighing the pros and cons before you take on new debt.

Not sure if you should take on a potential debt?  Here are a few questions to help you decide:

Can you pay cash?

In most situations, cash is the best way to go – even if you have to defer a larger purchase for a few weeks or months until you can save up the money.  Unless you’re dealing with a major purchase, like a car or a home, which leads me to the next question . . .

Should you pay cash?

Let’s say you need to buy a car and you have about $1,500 in extra cash saved up.  Now, I’m sure you could probably buy a car for $1,500.  Chances are, though, you’re not going to get a good, reliable, car for that price.  Paying cash might end up costing you more in repairs and maintenance to keep a $1,500 car running – and you’ll likely have to replace it fairly quickly.

When it comes to major, long-term purchases it’s important to look at the big picture.  Financing a newer, more reliable car might make more financial sense than wiping out your savings on a clunker – even if that means accruing some debt.

Can you afford the monthly payments?

Like I mentioned above, sometimes debt is worth it in the long run – especially when it comes to major, long-term purchases, like a car or a home.  Not many people can pay cash to buy a house outright.  But just because you’re taking out a mortgage loan, that doesn’t mean that you should take out the biggest loan you can get.  Run the numbers, review your budget, and make sure that you can actually afford your monthly payments.

Do you see any other major purchases on the horizon?

You’ve run the numbers, and you’re confident that, as of right now, you can afford to take on new debt.  But what about six months from now?  A year from now?  Is there a chance that you’ll need to come up with extra cash to pay for, say, a major home repair?  Will you need to replace your refrigerator?  Do you want to take a family vacation soon?

Before you commit to a new debt, make sure that the monthly payments won’t conflict with, or prevent, your future plans.

How long will your purchase last?

In general, the longer you expect to own the purchase, the more “worth it” it is to take on debt.  This is why taking on debt to purchase a home or a car or even a college education is a better decision than taking on debt for a smaller purchase with a much shorter lifespan such as a new television or even a new computer.

Are you getting the best possible terms?

Comparison shopping is always a good idea – especially when it comes to taking on a new debt.  Are you getting the best possible interest rate?  Are the repayment terms clear?  Could you do better with another lender?

If you’re considering credit card debt, do you have a repayment plan?

Really, you should only use a credit card in an emergency situation (and even then, only as a last resort, if you don’t have an emergency fund or any other source of available cash to pull from).   If you’re considering using a credit card, it’s important that you think the decision through.  Will you be able to pay your card off in full when your statement comes due?  And, more importantly, will you pay it off in full?

But, let’s say this is an emergency.  You can’t pay off the balance in full at the end of the month, but you really, truly can’t postpone the purchase.  In that case, it’s important to have a payback plan that will keep you from a future filled with debt problems.  A credit card debt is not like a mortgage or car loan where you have a fixed payment and a set loan time (5 years, 30 years etc.).  Credit card companies don’t have either of these; instead they demand the lowest possible payment to cover interest and a few cents of principle.  Because of that — and due to the fact that most people keep charging once they start using their credit cards — many people get into a situation where they keep paying their credit card bill year after year, without actually paying down much of the balance.  This is how people get caught up in long-term credit card debt.

Even if you can’t afford to pay your entire balance, you need to pay twice the minimum payment (or more, if you can afford it).  And, don’t make any new purchases with the card.  When the card is paid off, start building an emergency fund so you can avoid credit card debt in the future.

And remember, if you need information or advice about finances, savings, or how to pay off credit card debt, you can contact the Debt Guru team today for a free debt consultation.

Mike is the author of “Reality Millionaire: Proven Tips to Retire Rich” and he has been published in a variety of local and national publications including Entrepreneur Magazine, Deseret Morning News, LDS Living Magazine, and Physicians Money Digest. He holds a B.S. in business administration from the University of Phoenix.

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